i ACCOUNTING HAFIZ MOHYUDDIN TAHIR MAHMOOD zee vazeryChapter 1 INTRODUCTION W INTRODUCTION 1 8 in s According to R.N. Owen, business includes all the commercial and industrial activities goods and services to the people with an objective to earn profit. that provide | “Business’ refers to all, those activities which are related to the production oF purchase of goods and services with the object of selling them at a profit. It includes activities connected with manufacturing. trading, transporting, warehousing, insurance, banking and finance. It does not include non-economic and illegal activities of a man. So, business means all those activities which are related to the production and distribution of goods and services with the object of earning profit. 2, Kinds of business Some well knows types of businesses are as under: 21 Trading business Purchase and sale of goods without changing the shape and design of product. 2.2 Manufacturing business Purchase of raw material, employing labour and incurring further costs cither to change the shape, design or packing of product, and then sale of ultimate finished product. 23 Services based business | Inservice industry, there is no sale and purchase of goods. Just services are rendered to facilitate clients. For example, doctors, engineers, chartered accountants, etc. Business organization A business organization is one unit of control which is busy in the production or distribution of any commodity. Business organizations are of diversified nature from the point of view of ownership, control and size. A business organization may be owned by one person or a group of persons. Similarly, a business organization may be classified as small, medium or large. The business organizations may be controlled by the owners themselves or by the managers on the behalf of owners. 4. Forms of business organization Various forms of business organization may be classified as under: 4.1 Sole proprietorship Sole trading or sole proprietorship is the oldest form of business organization. It is as old as the civilization itself. Historically, it appears that business started first with this form of organization. It is the simplest and natural type of organization Sole proprietorship is also called individual proprietorship, or sole trade or one man business, Sole proprietorship is a form of business organization in which an individual introduces his owncapital, ILMI FUNDAMENTALS OF ACCOUNTING Chapter 1 ises his own skill and intelligence in the mana, zement of its affairs, assumes all the risks of business and is solely responsible for the results of its operations. He thus owns all and risks all. The bakery, hardware, sore, service stations, barbers shop, doctor's clinic, beauty parlors. ete are examples of sole proprietorship, Characteristics The main characteristics of sole proprietorship are as under: The ownership of the business unit is by one person. In sole trader-ship, the owner is the active manager of the business unit. If the business is large, he may delegate some of the business unit and some of the powers to his trusted employees. However, the overall control of policy is retained with the proprietor. The capital necessary for operating the business is normally provided by the owner himself, However, if additional funds are required, the capital can be increased by borrowing. The size of business unit is usually small, but it is not necessarily so. The features of small scale business, therefore, may or may not apply to it. The sole proprietor operates the business for his own personal interest. Therefore, he assumes all risks of business. The liability of the sole trader is unlimited. This means that the individual owner is legally liable for all the debts of his business. In case, the business assets do not satisfy the claims of the creditor, then the personal property of the sole trader can be taken to pay for the business debt. For example, Mrs. Rauf is the owner of “Huma Beauty Parlour’ in Gulberg Lahore. She has business assets worth Rs. 5 Lac but owes (liabilities of) Rs. 8 Lac. In case of loss or refusal to pay back the borrowed money, the creditor can force Mrs. Rauf out of business. He can recover Rs. 5 Lac from the sale of business assets of Mrs. Rauf. The balance of Rs. 3 Lac can be made up by attaching her personal assets like cars, television, A.C. etc. through court. Legally, the sole trader and his business are not separate entities. The owner and business exist together. Profit in business is his profit. Loss in business is his loss. Liabilities of his business are his liabilities. Proprietor are proprietorship are thus one. Sole trader can take prompt and immediate action within a legal framework. Sole proprietor has the power to start any lawful business without taking any advice from anyone. He can also end or dissolve it as and when he likes. He is the king of his business There are no legal formalities to set up this business. There may be legal restrictions on. the setting up a particular type of business. Partnership tion 4 of the Partnership Act defines partnership as “the relation between persons who have reed to share the profits of a business carried on by all or any one of them acting for all Persons who have entered into partnership with one another are called individual partners andter = 1 INTRODUCTION ‘ QB) collectively a firm and the name u name” ler which their business is curried on is culled the “tiem Characteristics he main characteristics of partnership are as under: i The duration of the partnership firm is always uncertain. If any partner dies. injured, withdraws, sells his interest, or a new partner is admitted into the business, or their arises difference the partnership may come to an end, there are every possibilities of the dissolution of the firm due to internal differences. ii, One of the main characteristics of partnership is that the partners are personally and jointly responsible for the all the debts of the firm. In case the business suffers losses and the business assets are not sufficient to satisfy the claimants on liquidation, the personal property of one or more than one partners can be sold under the Court order for the clearance of the debts of the business. The rich and wealthy persons, therefore, avoid to be enlisted in partnership. iii, ‘The partnership, like the sole proprietorship. can be easily organized. There are no complicated legal formalities involved in the establishment of partnership business. The partners enter into a partnership agreement, and start business iv. In case of sole proprietorship, the capital is limited to the savings of one owner or his borrowing capacity. Partnership can bring more capital to the business by the joint efforts of the partners. The partnership is normally in strong position to raise capital and expand the business, y ‘As there can be many partners involved in the operation of a business, the firm can distribute the duties and responsibilities to each partner for which one is best qualified and suited. Division of labour and specialization, thus, can promote efficiency of the: firm, vi. In partnership form of organization, each partner binds other partners by his acts done on behalf of the firm, Thus the other partners may have to pay for the follies and dish, vii. ‘There is an old saying that two heads are better than one, In case of partnership, the partner mutually consult each other about the lay out, production procedure, marketing channels, etc. and as a result, a wise course of procedure results viii. As liability of partners is unlimited, the partners, therefore, tend to be careful in taking business decisions. They adopt sound practices in the conduct of business. There is a brake on hasty decisions. ix. Ifany partner wishes to leave the firm or new partner wants to join it, the partners with mutual consultation can introduce the new blood in the business nd can permit the disinterested one to leave it, x. The profits are shared by the partners as per agreement. They are encouraged to do more work to earn more profit. Higher the profits, higher will be the partners share.ay {LMI FUNDAMENTALS OF ACCOUNTING Chapter — 1 Company (Corporation) Joint Stock Company ordinarily means an association of a number of individuals formed tor some common purpose. When a company is registered, it is clothed with a legal personality and has the same rights and powers as a human being has. Its existence is distinct and separate from that of its members, The members may die or change but the company goes on till it is wound up ‘on the grounds mentioned in the ordinance. Thus a company is an artificial person. It can act only through some human agency called the board of directors. They control and administer the affairs of the company and act as its agent. But they are not the agent of members of the company. Characteristics Followings are the main characteristics of company: i The company is incorporated under the Companies Ordinance. In all legal matters, therefore, it is dealt with as an individual person. The company can enter into contracts, borrow money, open bank account in its name. It can sue or be sued, hold, deal and dispose of property in its own name. ii, The life of a company to the partnership is very stable. If the business remains well managed, it can live on indefinitely. The life of a company is not affected by the death, disability, insolvency or disarrangement of a shareholder. Thé shareholders. may come or go the life of the company like an ‘artificial person’ is least affected by these changes. There is thus, a greater permanency of the companies. iii, In a company, all the shareholders have a limited liability. In case of loss to the company, the liability of the shareholders is limited to the amounts they have invested in the company. iv. One of the basic features of company is that the shareholders can transfer the ownership of shares to the interested parties through the share brokers. The company simply records the change of ownership. This facility provides liquidity to the Investors and stability to the company. v The companies divide the share capital into shares of small denominations in order to attract capital from large number of Investors for starting a big business and industrial enterprises. vi In a company, the management of activities is divided according to functions. The company employs ‘specialists’ in each department to do specific type of work. of purchase, sale, manufacturing, finance etc. under the supervision of directors of the company. The availability of highly skilled managerial talent, thus, gives greater permanence and continuity to the company. ; vii. Due to availability of large capital the company installs expensive and up-to-date machinery. There is thus greater production of goods. The cost is reduced and the firm can earn higher profits by producing better quality of goods. viii. ‘The company due to the increase in the size of business enjoys all the economies of large scale production.Chapter = 1 INTRODUCTION fo ix. This type of organization can undertake big risks which sole proprietorship of partnership form organizations cannot do. x. I company form of organization, the risk is distributed among large number of! shareholders. From the point of view of an investor, itis a great advantage. Note: All the above mentioned characteristics are related to Public Limited Company. 5 Accounting Accounting is an art of recording, classifying and summarizing of transactions and events and” interpreting the results thereof in, a significant manner and in terms of money. According to definition. there are five stages of accounting which are as under: Identifying The change is occurred whenever any transaction is held in the business. This stage is known as identifying stage. Recording We prepare a voucher of that transaction which is always be supported by an evidence and then record the transaction in the journal with the help of voucher. This stage is known as recording stage. Classifying Then we post the transaction from journal to ledgers of different accounts. After the end of a particular period, we get some debit / credit balances. With the help of these balances, we make a trial balance. This stage is known as classifying stage. ~ ‘Summarizing In this stage, we prepare the income statement and balance sheet with the help of trial balance. This stage is known as summarizing stage. Interpreting At the last stage of accounting cycle, we interpret and communicate the results to users with the help of financial statements. This stage is known as interpreting stage. In other words, we can say that accounting is a language used to communicate and understand financial information. Such terms as assets, liabilities, net income, cash flow, and expense are a few examples of technical accounting terms widely used throughout the business world. Every investor, manager, and business decision maker needs a clear understanding of accounting terms and concepts if he or she is to participate and communicate effectively in the business community. 6 Purpose of accounting Necessity is the mother of invention, Same is true in case of accounting. Owner of business and investors in such businesses are anxious to know the true financial and operating position of the business so as to decide about future investments. A businessman requires information regarding profit & loss in the business, amount to be received from customers i.e. debtors, amount to be paid to suppliers ie. creditors, loans taken, stock of goods, assets held by business, etc. Similarly, Govt. needs information, on the basis of which, tax is collected. Hence, to fulfill the information requirements of owner(s), investors, creditors and Govt. institutions people started collectively to develop some basic recording, classifying and summarizing techniques to gather such information. So, the purpose of accounting is to facilitate the businessman & other users tc get all the above information,(o ILMI FUNDAMENTALS OF ACCOUNTING Chapter ~ pes of accounting There are main three types of accounting 1 vancial accounting Financial accounting develops and communicates accounting information for imemal and external use. The principle purpose of financial accounting is to prepare financial statement in accordance with generally accepted accounting principles, 7.2 Cost accounting Cost accounting is the process of tracking, recording and analyzing costs associated with the activity of an organization, where cost is defined as ‘required time or resources’. Costs are measured in units of currency by convention \ currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange rather than e.g. a store of value. A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency 2ones, there are exchanges rates i. prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. 7.3 Management accounting - Management accounting is concemed with the provision and use of accounting information to managers within organizations, to facilitate the managers in their decision making and management control functions. Unlike financial accountancy information (which, for the most part, is made publicly available), management accounting information is used within an organization and is usually confidential 8. Financial statement Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of general purpose financial statements is to provide information about the Financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s i Assets; ii, Liabilities: iii, Equity: iv. Income and expenses, including gains and losses: and . Contributions by and distributions to owners in their capacity as owners; and Cash flows.Chapter INTRODUCTION cu) This information, alongwith other information in the notes, assists users of financial su predicting the entity's Future cash flows and, in particular, their timing and certainty jatements in 9% Components of financial statements \ complete set of financial statements comprises: i a statement of financial position as at the end of the period (Balance sheet) ii, a statement of profit or loss and other comprehensive income for the period (Income statement) iii, a statement of changes in equity for the period; iv. statement of cash flows tor the period; v. notes, comprising a summary of signiticant accounting policies and other explanatory information (Not in your syllabus); 9.1 Statement of financial position (Balance sheet) ‘A balance sheet is alist of assets and claims over a business at some specitic point of time and is prepared from an adjusted trial balance. It shows the financial position of a business by detailing the sources of funds and the utilization of these funds. A balance sheet shows the assets and liabilities grouped, properly classified and arranged in a specific manner. ‘The three main heads of accounts which are presented on the face of balance sheet are: 9.11 Assets Items which are owned by the business are called assets. Assets may be (a) Current assets: Which are expected to be exhausted (realized, recovered, sold, adjusted, settled etc.) within twelve months of balance sheet date. For example, debtors. prepayments, cash, bank, stock, advances paid, ete (b) —_Non-current assets Which’ are expected to be exhausted after twelve months or which benefit the entity for more than twelve months. Non-current assets may be classified as: (a) Tangible assets (b) Intangible assets (©) Long term investments (4) Long term prepayments 9.1.2 Liabilities (External liability Amounts payable by business to others are known as liabilities. Liabilities may be:3) 0, 94 ILM FUNDAMENTALS OF ACCOUNTING 4) Current liabilities Which will be due for payment in next twelve months of balance sheet date. For example, creditors, accrued expenses, short-term loans, advances received. ete. (b) —Non-current liabilities Which will be due for payment after the next twelve months of balance sheet date. For example, long term loan, debentures, ete. 9.1.3 Capital or owner's equity (Internal liability) This shows the amount invested by the owner into the business, Statement of comprehensive income (Income statement) The main purpose to prepare income statement is to ascertain net profit or net loss during an accounting period. The income statement can be defined as a report that summarizes the revenues and expenses of an accounting period to reflect the changes in various critical areas of firm's operation, It's also known as profit & loss account, The two main heads of accounts which are presented on the face of income statement are: 9.2.1 Expenses Expenses are incurred to run the business on day-to-day basis or to maintain an asset in good condition or to generate revenues. The benefit of an expense is received during current accounting period. For example, purchases, tax. salaries, wages, rent, interest, Insurance, advertisement, carviage, freight, depreciation, bad debts, etc Revenues Revenue is eamed from the sale of goods or rendering of services or by receiving dividend, interest on deposits, discounts, etc, For example, sales, dividend, interest. rent received, fee, commission, ete Statement of changes in equity A statement of changes in equity is a financial statement that presents a summary of the changes in owner's equity accounts over the reporting period. It reconciles the opening balances of equity accounts with their closing balances Statement of cash flows Statement of cash flows is the statement which shows the receipts (inflows) and payments (outtlows) made by the entity during the year and also the balance at the year end. From analysts, investors and creditors’ point of view, cash flow statement is highly important because it provides them information regarding liquidity position of the entity and helps them to make relevant decisions Accounting equation The fundamental concept on which accountin sed is the accounting equation. The equation is: Chapter-1 INTRODUCTION eo Assets = Capital + Liabilities Assets or any other item of the accounting equation can increase or decrease but «sseis will always be equal to capital + liabilities. Example-1 Complete the following table: “S.No. | Assets(Rs) | Liabifities(Rs.) | Capital(Rs.) U 25,000 1,800 zi 2 4,900) 2 3 2 6250 4 17,600 ? 15,000 Cs 2 7,000 17,000 Sotution-1 1, Capital = 23,200 2. Capital = 23,100 . 3. Liabilities = 2,150 4. Liabilities = 2,600 5. Assets = 24,000 11. Audit of financial statements ‘A financial statement audit is the examination of an entity's financial statements by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements. The auditor's report must accompany the financial statements when they are issued to the intended recipients. The purpose of a financial statement audit is to add credibility to the reported financial position and performance of a business. The Securities and Exchange Commission requires tha’ all entities that are publicly held must file annual reports with it that are audited. Similarly, lenders typically require an audit of the financial statements of any entity to which they lend funds. Suppliers may also require audited financial statements before they will be willing to extend trade credit (though usvially only when the amount of requested credit is substantial). 12. Users of financial statement The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information. Users can be internal or external1 {LMI FUNDAMENTALS OF ACCOUNTING Chapter - 1 Internal users Employees Employees and their representative groups are interested in information about stability and profitability of their employers. They are also interested in information which enable them to assess the ability of the enterprise to provide remuneration, retirement benetits and employment opportunities. Managers Managers need information to monitor the affairs of the entity and take corrective steps to make it a more profitable and better managed entity. They also need this information “or future planning (e.g. budgets based on provisions periods’ financial statements). 12.2 External users 12.2.1 Investors, They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends, Lenders Lenders are interested in information that enable them to determine whether their loans, and the interest attaching to them, will be paid when due Suppliers and other creditors are interested in information that enable them to determine whether amounts owing to them will be paid when due. Customers, Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on the enterprise. Government and their agencies Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and the’basis for national income and similar statistics. Publis Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities,Chapte 13. INTRODUCTION ay 12.2.7 Financial analysts and advisors Financial analysts and advisors use financial statements to make an analysis of the quality of earnings of the entity, its potential to maintain profitability and ability to pay dividends to the shareholders on the basis of this analysis. Thy advise their clients and/or public at large as to whether or not to invest or hold investonent in the entity Business transaction Business transaction is a change in any head of account measurable in terms of money in which business Assets > Liabilities (External liability) > Capital or owner's equity (Internal liability) > Expenses * Revenues These have been explained in chapter # | 2, Double entry system Double entry also known as entry or journal entry. Double entry system implies that for every debit, there is an equivalent credit. This means that if an entity records an amount in his books as debit, he must record an equivalent amount as credit 2.1 Rulles for double entry Debit Credit 1 Assets - Increase Decrease 2 Liabil Decrease increase 3. Capital Decrease Increase 4. Expenses Increase Decrease 5. Revenue Decrease Increase 2.2 Explanation of increase / decrease Now, we will explain the increase/decrease of all the heads of accounts in the following manner: 1. Assets Debit-Increase Credit-Decrease = Fixed Assets Acquired / Purchased Sold / Returned / Used + Investment Purchased Sold + Cashinhand Received Paid + Cash at Bank "Cash or cheque deposited Withdrawn cash or issued into bank chequesLMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 Prepayment Payment is made Time lapsed ‘Advances paid Payment is made Purpose is served Debtors Goods sold on credit Recovered the amount or debtor became bankrupt. Stock Goods unsold remaining at Goods sold the end of the period = Receivables Due Recovered Liabilities Debit-Decrease Credit-Increase = Loan Repaid Taken = Creditors Paid Goods purchased on credit ‘+ Expense payable Paid Expenses due + Advance received Purpose served Received Capital Debit-Decrease Credit-Increase . Drawings by owner eerie . Net loss, Net profit Example-1 Bought office furniture on credit from PADANA Ltd. A debtor, HUSSAIN, paid us in cash. Repaid part of loan from SHAHID by cheque. Returned some of office furniture to PADANA Ltd. ‘A debtor, SOHAIL, paid us by cheque. Bought motor vehicle by cash. Required: Identify assets/liabilities/capital. Show increase/decrease in the relevant account head. Also show which account is to be debited and which is to be credited. Solution-1 ~ ‘Asset | , 7 3 Increase | Debit(DR) S.No. Account Head Liability Capital | Deerease | Credit(CR) |_| Office furniture Asset Tnerease DR PADANA Lid. Liability | Increase CR 2 [Cash Asset Increase DR |Chapter - 3 JOURNAL, LEDGER AND TRIAL BALANCE, C HUSSAIN [Asset Decrease | 3 | SHAHID'S foan Liability Decrease | Banke Asset Decrease ; [PADANA Lid Liability | Office furniture Asset se | (5 [Bank Asset Increase °__[SORAIL - Asset Decrease - Motor vehicle Increase § [ash i Decrease Example-2 : 1, Bought motor van by cheque. 2. Paid creditor, SUFYAN, by cheque. 3. Repaid IDREES" loan by cash. 4. Sold motor van for cash. 5. Bought office equipment on credit from USMAN. 6, A debtor, SHAHBAZ, pays us by cheque. 7. A debtor, MAHMOOD, pays us by cash. 8. Proprietor puts a further amount into the business by cheque 9. A loan by cheque is received from SAJJAD. 10, Paid acreditor, ABDULLAH, by cash. Required: Identify assets/liabilities/capital. Show increase/decrease in the relevant account head. Also show which account is to be debited and which is to be credited. Sotution-2 | Asset t Increase Debit(DR) ene) eect fergie Decrease | Credit(CR) | [Motor van Asset Tnerease DR Bank Asset Decrease CR SUFYAN. Liability Decrease DR __[Benk Asset Decrease CR 5 JIDREES* joan Liability Decrease DR_ L Cash ‘Asset Decrease CR | 4 Cash Asset Increase DR Motor van ‘Asset Decrease CR 5 [Ofice =squipment [Asset Increase DR | USMAN Liability Increase cR 4 6 Bank [Asset Increase [DR |2 ILMI FUNDAMENTALS OF ACCOUNTH! Chapter-3.~ SHAHBAZ ‘Asset Decrease 4 Cash Asset Increase . MAHMOOD Asset Decrease | _ 2 3 [Sank Asset Increase Capital Capital Increase 9 [Bank Asset Increase | SAJIAD’s loan Liability Increase : ip) [ABDULLAH Liability |" Decrease Cash Asset Decrease 4. Expenses When to debit? When to credit? + Purchases Goods purchased Goods retumed or Return outwards or Purchases return * Allexpenses _ Incurred Adjustment - 5. Incomes ‘When to debit? ‘When to credit? = Sales Goods returned Goods sold or Return inwards or Sales return = Interest, fee, ete, Adjustment Earned Example-3 1. Goods bought on credit from OMER. 2. Goods sold on credit to FAROOQ. 3. Motor Vans bought on credit form ZAFAR. 4. Goods sold, a cheque received immediately. 3. Goods sold for cash. 6. We returned goods to OMER. Machinery sold for cash.Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE 8. Goods returned to us by FAROOQ. 9. Goods bought on credit from USMAN. 10. We returned goods to SHAHZEB. Required: Identify incomes/expenses/assets/liabilities. Show increase/decrease in account head. Also show which account is to ve debited and which is to be credited. Solution-3 Income. | ~ Expense Tucrease Debit(DR) BINS, eso eed Asset Decrease | Credit(CR) Liability ' Purchases Expense Increase DR ‘OMER, Liability | Increase CR 3 [FAROOQ Asset. Increase, DR Sales Income Increase | CR 3 Motor van Asset Increase. DR ZAFAR Liability Increase CR | 4 Bank Asset Increase | DR | Sales Income Increase CR 5 ca ‘Asset Increase DR Sales Income Increase cR 6 OMER Li lity Decrease DR Purchases return Expense Decrease CR > (Cash Asset Tncrease_| DR Machinery ‘Asset Decrease, ECR g [Sales return income | Decrease | ___DR FAROOQ Asset Decrease CR | 9 Purchases. Expense, Increase | DR | | USMAN Liability Increase cR io | SHAHZEB Liability Decrease DR. Purchases return Expense Decrease Ga! Example-4 ie Goods bought on credit from HAMZA._ Zz Goods returned to us by TALHA. 3 Machinery returned by us to SOBHAN. 4. Goods bought for cash. 5. Motor vehicle bought on credit from SUZUKI MOTORS. 6 Goods returned to us by HAMID. ABID paid us his account by cheque.G0) ILMI FUNDAMENTALS OF ACCOUNTING Chapter-3 8. Goods bought by cheque 9, We paid creditor, NASEER, by cheque. 10. Goods sold on credit to FARHAN. Required: Analyze the transactions showing account to be debited and account to be credited. Solution-4 ee Accounts tobe __|- debited | Credited Goods purchased on credit. Purchases: HAMZA _ Goods returned by debtor. Sales return | TALHA Machinery returned to creditor. SOBHAN | Machinery Goods bought for cash. Purchases | Cash Motor vehicle bought on credit. | Motor Goods returned by debtors, Sales retumm | HAMID. Cheque received irom debtor. Bank | __ ABID Goods purchased through cheque. | _ Purchases Bank Payment made to creditors through ROGER Poth cheque. Goods sold on credit. FARHAN Sales] 3. Accounting eyele Accounting cycle ‘Transaction (Changes) | Voucher (Supported by evidence) ! Journal (Recording the transactions) Ledger (Posting the transactions from journal) | Trial balance (List of balances of ledger accounts) | Final accounts (Preparing profit & loss account and balance sheet)Chapter -3 JOURNAL, LEDGER AND TRIAL BALANCE Gy ‘Whenever any transaction is held in the business, we prepare a voucher of that transaction, We record the transaction in the journal with the help of voucher. Then we post the transaction from journal to led: of different accounts. After the end of a particular period, we get some debit / credit balances. With the help of these balances, we make a trial balance which helps us in preparing the profit & loss account and balance sheet : Format of journal voucher | ABC Lid. VR No,——____ | Date. Particulars |_pebit(rs) | Creait(Rsy | jy (Rupees in words) Narration: Prepared by: Checked by: —__—. Authorized by: P Posted by: l 4 General journal Itis the first book in which the transactions of a business are initially recorded. In this book. transactions are recorded in chronological order, i.e. date wise. Each record in the generat journal is called an entry General journal is also called book of original entry. A journal entry is an analysis of the effects of a transaction. It also contains some description of the transaction. Before a journal entry is passed, it should be decided for each transaction, what accounts are involved. and which is to be debited and which is to be credited. Format of general journal Date Particulars LF | DebitR) | Credit(CR) 20XX Rs Rs. | | |BY ‘The date: Particulars: Ledger Folio (L.F): Example-5 2003 ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 The year is written at the top of the date column on each page of the journal Thereafter, in next line the month and date of the entry are written. The particulars’ column is the column for account titles and descriptions. ‘The name of the account to be debited is entered at the extreme left of the particulars column and the amount of the account debited is entered in the left hand money column. The name of the account to be credited is entered in the next line and is indented slightly to the right of the particulars column and the amount of the account credited is entered in the right hand money column. A short explanation of the transaction known as narration begins in the line immediately after the account credited, ‘The ledger folio column is filled when the accounts debited and credited are Posted to ledger accounts, the page number of the relevant ledger account is mentioned in this column, September 01 Started business with Rs. 20,000 in the bank. September 02 Bought office machinery by cheque Rs. 1,200. September 03 Bough office furniture Rs. 6,000 on credit from KHALID. September 03 Bought a motor vehicle paying by cheque Rs. 4,800, September 08 Sold some of the office machinery for Rs. 480 on credit to HAMEED, not suitable for the firm, September 15 Paid the amount owing to KHALID by cheque which is Rs. 6,000. September 23 Received Rs, 480 in cash from HAMEED. September 30 Bought more office furniture by cheque Rs. 2,240. Required: Draw general journal to record the above transaction in the books of HUSSAIN. Solution-5 Books of HUSSAIN General journal Date Particulars LF DR cR 2003 Rs, Rs. September 01 | Bank 20,000 Capital | 20,000 | (Started business with cash) } September 02 | Office machinery 1,200 Bank 1,200 (Bought office machinery by cheque)2 Re ee * Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (33) September 03 | Office furniture 6,000 | ] , KHALID | 6.000 (Bought office furniture on credit) September 05 | Motor vehicle 4,800 peat 4,800 (Bought motor vehicle by cheque) ‘September 08 | HAMEED 430 Office machinery 480 (Sold office machinery on credit) September 15 [KHALID 6,000 Bank 6,000 (Amount due has been paid) September 23 | Cash 480 HAMEED 480 | (Received cash from HAMEED) September 30 | Office furniture 2,240 j Bank 2.240 | (Purchased office furniture by cheque) Total 41,200 41,200 Example-6 > 2004 : June 01 Started business with Rs. 15,000 in cash. June 02 Paid Rs. 13,500 of the opening cash into a bank account for the business. June 05 Bought office furniture on credit from YOUNUS for Rs. 900. June 08 Bought a motor vehicle worth Rs. 7,125 by cheque. June 12 Bought machinery worth Rs. 4,200 from JAVED.on credit! June 18 Returned faulty office furniture costing Rs. 465 to YOUNUS. June 2S Sold some ofthe machinery for Rs. 560 cash, June 26 Amount owing to YOUNUS Rs. 435 paid by cheque. June 28 Took Rs. 750 out of the bank and put it in the cash till. June 30 Y.AQOOB lent us Rs. 3,750 giving us the money by cheque. Required: Pass Journal Entries in the books of IDREES. sectBy Solution-6 ILMI FUNDAMENTALS OF ACCOUNTING Books of IDREES General journal Chapter - 5 2004 June 01 June 02 June 05 June 08 June 12 June 18 June 25 June 26 June 28 June 30 Date _[- Particulars LE | (Deposited cash into bank) Office furniture YOUNUS (Bought furniture on credit from YOUNUS) Motor vehicle Bank (Bought motor'vehicle by cheque) Machinery JAVED (Bought machinery on credit from JAVED) YOUNUS. Office furniture (Returned faulty goods to YOUN S) Cash Machinery (Sold machinery for cash) YOUNUS. “> Bank . (Paid YOUNUS by cheque) Cash. Bank (Cash withdrawn from bank) Bank YAQOOB's loan (Loan received from YAQOOB by cheque) 15,000 | 13,500 | | | | 7.125 4,200 560 435 730 3.750 15,000 | 13.500 900 7.125 4.200 465 560 | 435 750 3.750 Total 46.685 16,685 Example-7 2006 January 01 January 05 January 06 January 08 January 10 Started business with Rs. $00,000 cash, Bought goods for cash Rs. 85,000. Bought goods on credit worth Rs. 116,000 trom JAVED. Sold goods for cash Rs. 42,000. Returned goods to JAVED worth Rs. 28,000.Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (33) January 16 Bought goods of Rs. 98.000 from DANISH on credit. . January 20 Returned goods to DANISH worth Rs. 19,000. January 25 Sold goods to FARHAN worth Rs. 55,000 on credit. January 27 Paid JAVED's account by cash Rs. 88,000. : January 31 FARHAN paid us his account of Rs. $5,000 by cash. Required: Pass Journal Entries in the books of ASHRAP. : Solution-7 Books of ASHRAF General journal Date Particulars LF DR cR 2006) Rs.” Rs. January 01 | Cash ” 500,000 Capital 500,000 (Started business with cash" . January 05 [Purchases 85,000 Cash y 85,000 (Goods purchased for cash)_ January 06 | Purchases : 116,000 | JAVED, 8 : 116,000 | (Goods purchased on credit from JAVED) | | January 08 | Cash . 42,000 q Sales i 42.000 (Goods sold for cash) | January 10 | JAVED. 28,000 Purchases return: 28,000. (Goods returned to JAVED) . - January 16 | Purchases. i 98,000. DANISH 98.000 (Goods purchased on credit from DANISH) January 20 [ DANISH’ = 19,000 Purchases retum: 19,000 (Goods returned to DANISH). January 25 [FARHAN 55,000 Sales 55,000} (Goods sold on credit to FARHAN) | January27 [JAVED 88,000 . . | 38.000) (Cash pai to JAVED) | January 31 Cash 95,000 | FARHAN. 55,000} (Cash received from FARHAN) | Total 1,086,000, Toe 00}(36) Example-8 2008 ‘November 01 November 03, November 03, November 03 November 05 ‘November 07 November 09 November 09 ‘November 10 November 11 November 13 November 14 November 16 November 17 November 19. November 19 November 23 November 24 ‘November 24 November 25 November 27 November 28 November 30 {LMI FUNDAMENTALS OF ACCOUNTING Chapter-3 Started business with Rs. 550,000 in the bank. YASIN lent us Rs. 22,000 in cash. Bought goods on credit from BILAL worth Rs. 46,200, Bought goods on credit from Waqas worth Rs. 198,000. Sold goods for cash Rs. 11,000. Took Rs. 13,750 out of the cash and pai into the bank. Sold goods of Rs. 9,900 to RAFI on credit. Sold goods of Rs. 12,100 to AZAM on credit. Bought goods on credit from BILAL worth Rs. 20,350. RAFI returned goods to us worth Rs. 2,200. ‘Sold goods on credit to AMIN Rs. 10,450 and to ARIF Rs. 17,600. We returned goods to BILAL worth Rs. 7,700. Purchase a motor vehicle on credit from FALCON MOTORS worth Rs. 143,000. Purchase office furniture on credit from WOOD WORTH worth Rs. 33,000. We returned goods of Rs. 6,050 to WAQAS: Purchased goods for cash Rs. 12,100. Goods sold for cash Rs. 3,850, Paid money owing to BILAL by cheque Rs. 58,850. Goods returned to us by AMIN worth Rs. 1,650. Returned some of office furniture to WOOD WORTH costing Rs. 8,800. RIAZ put a further Rs. 27,500 into the business in the form of cash. Paid FALCON MOTORS Rs. 143,000 by cheque. ‘Purchased office furniture for cash Rs, 5,500, Required: Pass Journal entries in the books of RIAZ..Chapter -3 JOURNAL, LEDGER AND TRIAL BALANCE . G7 Solution-8 Books of RIAZ General journal Date Particulars LF [DR cR J 2008 Rs. Rs. | November 01 | Bank 550,000 | Capital 550,000 | (Started business with bank account) | November 03 | Cash 22,000 YASIN’s loan 22,000 (Loan acquired from YASIN) November 03 | Purchases 244,200 BILAL 46.200 WAQAS 198.000 (Goods purchased on credit from BILAL and | WAQAS) ‘November 05 [Cash 11,000 Sales 11,000 (Goods sold for cash) November 07 [Bank 13,750 Cash 13,750 (Cash paid into bank) November 09 [RAFI 9,900 AZAM 12,100 Sales | 22,000 ‘ (Goods sold on credit from RAFI and AZAM) | November 10 | Purchases 20,350 | BILAL 20.350 | (Goods purchased on credit from BILAL) November 11. Sales retumn 2,200 RAFI 2.200 (Goods returned.by RAFI) | November 13 AMIN 10,450 | | | ARIF | 17,600 Sales 28,050 joods sold on credit re credit from AMIN and ARIF) ma Purchases return ao) (Goods returned to BILAL) Motor vehicle 143,000) FALCON MOTORS, ae (Motor vehicle purchased on credit from FALCON MOTORS) Office furniture SS WOOD WORTH eon (Furniture purchased on credit from WOOD WORTH) WAQAS 6.050 Purchases return | e050 (Goods returned to WAQAS) | | November 16 November 17 November 19 | L(38) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 [ November 19 | Purchases a ] 12,100 - | Cash | 12.100 (Goods purchased for cash) | | | November 23 | Cash 3,850 Sales | 3.850 | (Goods sold for cash) | November 24 | BILAL | 58,850 j Bank s | (BILAL’s account paid through cheque) | November 24 | Sales return 1,650 ‘AMIN (Goods returned by AMIN) ! November 25 | WOOD WORTH 8,800 | Office furniture (Office furniture returned by WOOD | WoRTH) | November 27 | Cash 27.500 Cay (Further cash introduced by RIAZ) November 28 [FALCON MOTORS: 143,000 Bank 143.000 (Paid FALCON MOTORS through cheque) Office furniture a 5,500) Cash | 5,500 (Office furniture purchased for cash) | Total 1,364,530 | 1,364,550 November 30 General ledger ‘The general ledger is a principal book of account where similar transactions relating to a particular person or thing are recorded. In this stage, separate accounts are prepared for each different head of account involved in the transactions. For example “Purchases Account” will be mentioned to record all purchases in an accounting period. It is not possible to ascertain from general journal the total amount of purchases made. Therefore, similar transactions should be sorted and consolidated at one place to ascertain their net effect. So, an account represents a detailed record of changes that have occurred particular asset, liability, expense or income during an accounting period. 5.1 Classification or posting The process of transferring the debits and credits from the general journal to general ledger is called posting. Each amount entered in the debit column of the general journal is posted by entering it on the debit side of an account in the general ledger, and each amount written in the credit column of the general journal is posted by entering it on the credit side of an account in the general ledger. Example-9 Enter the following transaction in the journal and then post i in the ledger accounts, “Business started with Rs, 2,000 cash on Ist January. 2002~ — Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (39) Solution-9 General journal Date Particulars LF | pR CR 2002 Rs, Rs. Jan 01 | Cash 2,000 Capital 2,000 | (Business started with cash) General ledger Cash i Date | Particulars | R| Amount | Date | Particulars | R. | Amount | 2002 Rs. 2002 Rs. Jan 01 | Capital 2,000 | Dec 31 | Balance cid 2,000 2,000 2,000 Cay . Date Particulars R. | Amount | Date Particulars | R. | Amount 2002 Rs. | 2002 Rs. Dec 31 | Balance c/d 2,000 | Jan 01 | Cash 2.000 2,000 | 2,000 Note: The forms of ledger accounts will be discuss oh the next page. 52 Balancing the accounts Periodically, all the accounts in a general ledger are balanced to ascertain the cumulative effect of entries in the accounts. The balance is an accounting term which means the difference between the two sides of an account, or the total of an account containing only debits or credits: . Where the total of the debit side exceeds the total of the credit side, the account is said to have a“Debit Balance”. . Where the total of the credit side exceeds the total of the debit side, the account is said to have a “Credit Balance”. = Opening balance is denoted by the words “Balance b/d” and is read as “Balance Brought Down”. If debit, itis written on the debit side of the account and if credit, written on the credit side of the account in the very first line. . Closing balance is denoted by the words “Balance c/d” and is read as “Balance Carried Down” If debit, itis written on the credit side of the account and if credit, written on the debit side of the account in the last line before total . Generally > Assets have debit closing balances; > Capital / Equity has credit closing balance; Liabilities have credit closing balances;0) 53 ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 > Incomes have credit closing balances; and > Expenses have debit closing balances. Formats of ledger accounts There are two main forms of ledger accounts which are: 53.1 “T? account form It is a simplified presentation of ledger accounts and is widely used. A “T” account is divided into two sides, the left hand side represents the debit side and the right hand side represents the credit side, Each side of the ledger has following columns: (a) Date (b) Particulars (c)_ Reference (R.) (4) Amount Specimen Title of account Date | Particulars | R. [ Amount | Date | Particulars | R. | Amount 20xx Rs. | 20xx Rs. 5.3.2 Running balance form ‘An alternative ruling of a ledger, which is generally adopted by commercial banks and some other business houses, is that entire ledger is divided into six columns as under: (a) Date (b) Particulars (©) Reference (R.) (@ Debit column (Dr.) (©) Credit column (Cr.) oO BalanceChapter -3 JOURNAL, LEDGER AND TRIAL BALANCE, ap Specimen Title of account _ Date __ Particulars R_| vx | CR | Balance | | 2oxx | J Rs] Rs. Rs. | , tt 6 ‘Trial balance “Trial balance is a list of net balances extracted from the general ledger.” For every transaction in the double entry system, equal amounts of debits and credits are recorded in the books of account. If all the transactions have been recorded correctly, total of the debits should be equal to the total of credits, Similarly, if all the accounts have been correctly balanced, the total of the accounts with debit balances, must be equal to the total of the accounts with credit balances. To check the accuracy of the recording and posting of each transaction as well as the correct balancing in the ledger accounts, “Trial Balance” is drawn. A trial balance is simply a list of the titles and balances of all the accounts in the ledger in the order in which they appear in the ledger. Trial balance contains five columns: (a) Serial number (S. No.) (b) Head of account (©) Ledger folio (L.F) (4) Debit column (DR) (©) Credit column (CR) Spesimen - Trial balance As on December 31, 20xx. S.No. ‘Head of Account LF | DR cR_ | | Rs. Rs.(2 [LMI FUNDAMENTALS OF ACCOUNTING Chapter -3 Example-10 Prepare ledger accounts of example # 5 in “T™ account form. Also prepare the trial balance. Solution-10 General ledger Bank Date Particulars R. | Amouat | Date Particulars 2003 Rs. | 2003 Sep-01 | Capital 20,000 | Sep-02 | Office machinery 1,200 Sep-05 | Motor vehicle 4,800 Sep-15 | KHALID 6.000 Sep-30 | Office furniture | 2,240 Sep-30 | Balance c/d 20,000 Capital _ Date Particulars R | Amount | Date Particulars R. | Amount 2003, Rs. | 2003 Rs. Sep-30 | Balance e/d 20,000 | Sep-01 | Bank 20,000 20,000 | 20,000 Office machinery Date Particulars: Re | Amount |. Date: Particulars & | Amount 2003 Rs. | 2003 Rs. Sep-02 | Bank 1,200 | Sep-08 | HAMEED 480 Sep-30 | Balance c/d 720 | 1,200 | 7,200 Office furniture Date Particulars: R. [| Amount | Date Particulars R | Amount 2003 Rs. | 2003 Rs, ‘Sep-03 | KHALID 6,000 |. - Sep-30 | Bank 2,240 | Sep-30 | Balance c/d 8.240 8,240 | 8,240 KHALID Date Particulars x Date Particulars: R 2003 2003 Sep-I5 | Bank Sep-03 | Office furniture L | Motor vehicle Date Particulars R. | Amount | Date | Particulars | R. | Amount | 2003 Rs. 2003. | | Rs. | sep-05 | Bank 4,800 | Sep-30 | tAlance e/d 4.800 | | 4,800 4.800 _Chapter -3 JOURNAL, LEDGER AND TRIAL BALANCE (43) HAMEED Date Particulars R | Amount | Date Particulars | R. | Amount | 2003 Rs, 2003 Rs, | Sep-08 | Office machinery 480 | Sep-23 | Cash 480 | | | ae j—— 180} Cash {Date Particulars R. | Amount | Date Particulars R. | Amount 2003 Rs. 2003 Rs. Sep-23 | HAMEED 480 | Sep-30 | Balance c/d 480 480. 480 Trial balance As on September 30, 2003 [SNe Head of account LF [| DR CR | Rs. Rs, 1 | Bank 5.760 2 | Capital 20,000 3 | Office machinery \ 720 | 4 | Office furniture | 8.240 5 | KHALID | | 6 | Motor vehicle - : 4.800 | 7 | HAMEED | | 8 | Cash |___s80 | 20,000 | 20,000 Example-11 Prepare ledger accounts of example # 5 in running balance form. Solution-11 General ledger Bank Date Particulars R. DR. CR] Balance 2003 Rs. Rs. | Rs. | Sep-0t | Capital 20,000 | DR 20.000 Sep-02' | Office machinery | 1,200| pr. “Ta.800 Sep-05 | | Motor vehicle | 4.800] DR 14.000 Sep-i5 | KHALID | 6,000 | DR 8.000 |~ Sep-30 | Office furniture 2.240 | DR__ 5,760 | Capital Date Particulars R | DR CR Balance 2003 Rs, Rs. Rs. Sep-01_| Bank 20,090 | CR_ 20,000(4) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter -3 Office machinery Date | Particulars R. DR CR Balance 2003 Rs. Rs. Rs. Sep-02. | Bank | 1,200 | \pR° 1.200 |_Sep-08 | HAMEED | 480|DR___720 | Office furniture Date_| Particulars R. DR. cR Balance 2003 Rs. Rs. Rs. Sep-03 | KHALID 6,000 DR 6.000] . Sep-30_| Bank 2.240 DR__ 8,240 KHALID _ Date Particulars R | DR cR Balance 2003 Rs. Rs. Rs. Sep-03 | Office furniture 6,000} CR 6,000 Sep-15_| Bank =. 6,000, Nil Motor vehicle {Date | Particulars R DR. CR Balance 72003 = Rs. Rs. Rs. Sep-05_| Bank - 4,800 DR__4,800 HAMEED, Date | Particulars: R DR cR Balance 72003 Rs. Rs. Rs. Sep-8 | Office machinery 480 DR 480 Sep-23_| Cash 480] Nil : Cash Date Particulars R. DR cR Balance | 2003- Rs. Rs. Sep-23_ | HAMEED 480 DR___480 Example-12 Prepare ledger accounts of example # 6 in “T" account form. Also prepare the trial balance. Solution-12 General ledger Cash (Date Particulars R. | Amount | Date R. | Amount | 2004 72004 Rs. Jun-O1 | Capital 15,000| Jun-02 | Bank 13.500 Jun-25 | Machinery 360 Jun-28 | Bank 750 | Jun-30 | Balance c/d 2.810 16,310 | 16,310Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE. us) Capital = {_ Date Particulars R. | Amount | Date Particulars Amount | 2004 Rs. | 2004 Jun-30 | Balance o/d 15,000 | Jun-01 | Cash 15,000 {15.000 | Bank. _ Date Particulars R. | Amount | Date Particulars ‘Amount 2004 Rs. | 2004 Rs. Jun-02 | Cash 13,500 | Jun-08 | Motor vehicle 7,125 Jun-30, | YAQOOB’s loan 3,750 | Jun-26 | YOUNUS 435 : Jun-28 | Cash 750 Jun-30 | Balance c/ 8.940 17,250 17,250 Office furniture Date Particulars R.| Amount | Date Particulars ‘Amount 2004 Rs. | 2004 Rs. Jun-05 | YOUNUS 900 | Jun-18 | YOUNUS 465 Jun-30 | Balance o/d |___43s | [900 900 YOUNUS, < Date Particulars: R [Amount | Date Particulars ‘Amount 72004 Ref 2004 Rs. June18 | Office furniture 465 | Jun-05 | Office furniture 900 Jun-26 | Bank 435 300 900) = ~ Motor vehicle Date: Particulars. | -R. | Amount |” Date Particulars ‘Amount [2004 Rs. | 2004 = Rs. Jun-08 | Bank 7125 | Jun-30 | Balance o/d 7125 : 7,125 7,125 Machinery Date. Particulars R | Amount | Date Particulars ‘Amount 72004 Rs. | 2004 Rs. Jun-12 | JAVED 4,200 | Jun-25 | Cash 360 » Jun-30 | Balance c/d 3,640 4,200 4,200 JAVED Date Particulars R | Amount | Date Particul Amount 2004 Rs. | 2004 Rs. Jun-30 | Balance c/d 4,200 | Jun-12 | Machinery 4.200 4,200 4,200(46) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 . YAQOOB’s loan Date Particulars R | Amount | Date | Particulars | 2004 Rs. 2004 | Jun-30 | Balance c/d 3,750 | Jun-30 | Bank | 3.750 | Trial balance 7 As On June 30, 2004 _ Head of Account LF DR CR Rs. Rs, 1 2,810 1 2 ~apital 15,000 } 3 Bank | 8,940 4 Office furniture | 435 5s | YoUNUS | 6 Motor vehicle 7125 7 Machinery 3,640 8 JAVER * 9 YAQOOB's loan 22,950 Example-13 : Prepare ledger accounts of example #7 in running balance form. Also prepare the trial balance. Solution-13, General ledger Cash Date Particulars R | oR CR Balance 2006 Rs, Rs. Rs. Jan-O1 | Capital 500,000 DR 500,000 Jan-05 | Purchases 85,000 | DR 415,000 Jan-08. | Sales , 42,000 DR 457,000 Jan-27 | JAW LU 88,000 | DR 369,000 Jan-31_| FARHAN 55,000 | DR_ 424.000 Capital Date Particulars R | DR CR Balance 72006. Rs. Rs, Rs. Jan-01_| Cash 00,000 | CR_500,000 Purchases Date Particulars [TR DR CR | Balance 2006 Rs. Rs. | Rs. Jan-05_ | Cash -85,000 | DR 85,000 | Jan-06 | JAVED | 116,000 | DR 201,000 | Jan-16_| DANISH 98,000 LDR 299.000 | nee armaniChapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (a7) JAVED a - Particulars LR [pr {cr [ Rs. Rs Jan-06 | Purchases 116,000 | CR 116.000 | Jan-10 | Purchases return 28,000 CR 88.000 | Jan-27_| Cash 7 88,000 | Sales - { Particulars R [DR [| CR | Balance | - Rs. Rs. Rs. Cash 42,000 | CR 42.000 | _| FARHAN 55,000 | CR _97.000 Purchases return Date Particulars R | DR CR Balance) 2006 Rs. Rs. Rs. Jan-10 | JAVED 28,000 | CR 28,000 Jan-20_| DANISH 19,000 | CR__47,000 DANISH Particulars R_ | OR cR Balance Rs. Rs. Rs. Purchases | : 98,000 | CR 98,000 Purchases return ! 19,000 CR_79,000 FARHAN Date | Particulars R DR. CR Balance |” 2006 Rs. Rs. Ree | Jan-25 | Sales 35,000 DR 55,000 Jan-31__| Cash ! 55,000 Nil Trial balance As on January 31, 2006 |_S.No. Head of Account LE DR CR : Rs. Rs 1 | Cash 424,000 2 | Capita | | 500,000 3 | Purchases | | 299,000 | | 4 | JAVED | | 5 | Sales 8 | 97.000 6 | Purchases return | | 47,000 7 | DANISH | | 79.000 8 | FARHAN | | | | 723,000 | 723000ay (48) Question # ILMI FUNDAMENTALS OF ACCOUNTING Chapter = 3 PRACTICE QUESTIONS Identify the head of account in the following transaction. Show the increase or decrease in the relevant heads of account. Also show that which account is to be debited and which is to be credited (a) Bought motor lorry for cash, (b) Paid creditor, WAHAAB, by cheque. (©) Repaid ABID's loan by cash. () Sold motor lorry for cash. (©) Bought office machinery on credit from ULTRA Ltd. + (9 A debtor, GHAZI, paid us by cash. Question # 2: Question #3: (@) A debtor, SHAMAS, paid us by cheque. (h) Proprietor puts a further amount into the business by cheque. (@—Alloan received from ALI in cash. ‘ G)___ Paid a creditor, LUQMAN, by cash. Identify the head of account in the following transaction. Show the increase or decrease in the relevant heads of account. Also show that which account is to be debited and which is to be credited. Show the amount of debit and credit. (@) We pay a creditor, AHSAN, Rs, 700 in cash. (b) Bought fixtures Rs. 200 paying by cheque. (©) Bought goods on credit from ARSLAN Rs, 275. @) The proprietor introduces Rs. 500 cash into the firm. (e) WAHEED lends the firm Rs. 200 in cash. () A debtor, SUNEEL, pays us Rs. 50 by cheque. (g) We returned goods costing Rs. 60 to ARSLAN whose bill we had not paid. (h) Bought additional shop premises paying Rs. 5,000 by cheque. Identify the head of account in the following transaction. Show the increase or decrease in the relevant heads of account. Also show that which account is to be debited and which is to be credited. Show the amount of debit and credit. (@) Bought a motor van on credit from ASLAM Rs. 500. (b) Repaid a foan of Rs. 1,000 owed to DANISH in cash.Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE 9) (c) Bought goods of Rs. 150 paying by cheque. (d) The owner puts further Rs. 5,000 cash into the business. * (e) Goods sold to ARIF worth Rs. 100. - (8 A debtor retums to us Rs. 80 goods. We agree to make an allowance for them. (g) Bought goods on credit from KASHIF Rs. 220. (h) The owner takes out Rs. 100 cash for his personal use. (i) We pay to KASHIF Rs. 190 by cheque. Question # 4: Identify the head of account in the following transaction. Show the increase or decrease in the relevant heads of account. Also show that which account is to be debited and which is to be credited, Show the amount of debit and credit along with the date of transaction. 2004 June 01 Started business with Rs. 5,000 in the bank. June 02 Bought motor van paying by cheque Rs. 1,200. June 0S Bought office fixtures of Rs: 400 on credit from YOUNG Ltd. : June 08 Bought motor van on credit from SUPER MOTORS worth Rs. 800. June 12 Took Rs. 100.out of the bank and put it into the cash till. June 15 Bought office furniture paying by cash Rs. 60, q June 19° Paid Rs: 800 to SUPER MOTORS by cheque. June 21 A loan of Rs. 1,000 received from ANWAR in the form of cash. June 25 Paid Rs. 800 of the cash in hand into the bank account. June 30° Bought more:office fixtures paying by cheque Rs. 300. ‘Question # 5: Prepare general journal for the following transactions: 2005 March 01 Started business with Rs. 1,000 cash. | March 02 Received a loan of: Rs. 5,000: from SHAHZAD by cheque, a bank account being “March 03. Bought machinery for cash Rs. 60. March 05 Bought office equipment on credit from SUNDAR Ltd. worth Rs. 550. March 08 Took Rs 300 out of the bank and put it into the cash till.(30) Question # 6: " ILMI FUNDAMENTALS OF ACCOUNTING Chapter -3 . March 15 Repaid part of SHAHZAD's loan by cheque of Rs. 800, March 17 Paid the whole amount owing to SUNDAR Ltd, by cheque. March 24 Repaid part of SHAHZAD’s loan by cash Rs. 100. March 31 Bought additional machinery of Rs. 500, ths time on credit from RAZA. ‘Also prepare ledger accounts in “T” account form. Also prepare the trial balance. Pass journal entries in the books of ILYAS: 2008 July 01 Started business with Rs. 10,000 in the bank. July 02 COOPER lent us Rs. 400 in cash. July 03 Bought goods on credit from JONES Rs. 840 and CHARLES Rs. 3,600. July 04 Sold goods for cash Rs. 200. July 06 Took Rs. 250 of the cash and paid it into the bank. July 08 Sold goods on credit to MOODY worth Rs. 180. July 10, ‘Sold goods on credit to NEWMAN worth Rs. 220. July 11 Bought goods of Rs. 370 on credit from JONES. July 12 MOODY returned goods to us Rs. 40. July 14 Sold goods on credit to MORGAN Rs. 190 and PEAT Rs. 320. July 15 We returned goods to JONES Rs. 140. July 17 Bought motor van on credit from MANCHESTER MOTORS Rs. 2.600. July 18 Bought office furniture on credit from FASTER Ltd. Sear Rs. 600. July 19 We returned goods of Rs. 110 to CHARLES. July 20 Bought goods for cash Rs. 220. July 24 Goods sold for cash Rs. 70: July 25 Paid money owing to JONES by cheque Rs. 1,070, July 26 Goods returned to us by MORGAN worth Rs. 30. July 27 Retumed some of office furniture costing Rs. 160 to FASTER Lid. July 28. ILYAS puta further Rs. 500 into the business in the form of cash.. Chapter -3 JOURNAL, LEDGER AND TRIAL BALANCE sb . July 29 Paid MANCHESTER MOTORS Rs. 2,600 by cheque. July 31 Bought office furniture for cash Rs. 100 Question #7: Pass journal entries in the books of SHAHBAZ. 2007 October 01 Started business with Rs. $0,000 in the bank. October02 Purchased goods on credit from SALMAN Rs. 22.500. October 03 Purchased goods on eredit from HASEEB Rs. 6,250. October 06 Sold goods for cash Rs. 4,500. October 07 We returned goods to SALMAN Rs. 1,000. October 09 Purchased goods on credit form HASEEB Rs. 4,750. : October 11 Sold goods on credit to WASEEM Rs. 9,750, October 13. Sold goods for cash Rs. 5,250. October 17 Took RS. 7,500 of the cash and paid it into the bank. 5 October 20. Purchased machinery by cheque Rs, 13,750. October 23. Sold goods on credit to MUNEEB Rs. 5,500. October 25. WASEEM returned goods to us Rs. 3,500. October 27 MUNEEB returned goods to us Rs. 250. October 29 We returned goods to HASEEB Rs. 750. October 30 We paid SALMAN by cheque Rs. 21,500. October 31 Purchased machinery on credit from LUQMAN Rs. 6,750. Question #8: Pass journal entries in the books of AZHAR. 2009 > June 01 Started business with cash Rs. 135,000. June 02 Bought goods on credit from AHMAD Rs. 26,640. June 03 Paid rent by cash Rs. 2,520, June 04 Paid Rs. 90,000 of the cash into bank account. June 06 Sold goods on credit to ELAHI Rs. 4,860.(32) ILML FUNDAMENTALS OF ACCOUNTING Chapter -3 June 08 Bought stationery Rs. 1,350 paying by cheque. June 10 Cash sales Rs. 4,410. June 13 Goods returned by us to AHMAD Rs. 1,530. June 16, Sold goods on credit to MASOOD Rs. 2,610. June 19 Paid for repairs to the building by cash Rs. 1,620. June 21 ELAHI returned goods to us Rs. 1,260. June 26 Paid AHMAD by cheque Rs. 25,110. June 27 Cash purchases Rs. 11,250. June 28 Bought a motor vehicle paying by cheque Rs. 35,550. June 29 Paid motor expenses in cash Rs. 1,350. June 30 Bought fixtures of Rs. 10,800 on credit from OSAMA. Also prepare ledger accounts in running balance form. Also prepare the trial balance. Question #9: You are to enter the following transactions, complete the double entry in the books for the month of May 2006. Also prepare trial balance. 2006 May 01 May 02 May 03 May 05 May 06 May 10 May 12 May 18 May 21 May 23 May 24 May 30 May 31 Started business with Rs. 2,000 in the bank. Purchased goods of Rs. 175 on credit from MOHSIN. Bought fixtures and fittings Rs. 150 paying by cheque. Sold goods for cash Rs. 275. Bought goods of Rs. 114 on credit from AZHAR. Paid rent in cash Rs. 15. Bought stationery of Rs. 27 in cash. Goods returned to MOHSIN Rs. 22. Let off part of the premises receiving rent by cheque Rs. 5. Sold goods on credit to HAROON for Rs. 77. Bought a motor van paying by cheque Rs. 300. P the month's wages by cash Rs. 117. The proprietor took cash for himself Rs. 44.Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (33) Note: Use the running balance form for ledger accounts. Question # 10: Write up the following transactions in the books of TALHA. Also prepare the tral balance 2007 March 01 Started business with cash Rs. 1,500. March 02 Bought goods on credit from HASSAN Rs. 296. March 03. Paid rent by cash Rs. 28. March 04 Paid Rs. 1,000 of the cash of the firm into a bank account. March 0S Sold goods on credit to EHSAN Rs. $4, March 07. Bought stationery Rs, 15 paying by cheque. March 11 Cash sales Rs. 49. March 14 Goods returned by us to HASSAN worth Rs. 17. March 17 Sold goods on credit to MUSHARIF worth Rs. 29. March 20 Paid for repairs of the building in cash Rs. 18. March 22. EHSAN returned goods to us Rs. 14. March 25 Received cash Rs. 27 from EHSAN in full settlement. March 27. Paid HASSAN by cheque Rs. 270 in full settlement. March 28 Cash purchases Rs. 125. March 29 Bought a motor van paying by cheque Rs. 395, March 30 Paid motor expenses in cash Rs. 15. March 31 Bought fixtures worth Rs. 120 on credit from WASEEM. Note: Use the “T” account form for the ledger accounts.(34) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 ASSIGNMENT MATERIAL A.M# 1: Show the effects (increase/decrease) in accounting heads of the following transactions; (a) Wepay creditors Rs. 700 in cash (b) Bought fixtures Rs.200 paying by cheque * (©) Bought goods on credit Rs.275 (4) The proprietor introduces Rs.500 cash into the firm. (©) Waheed lends the firm Rs. 200 in cash (2) A debtor pays us Rs. 50 by cheque (a) We return goods costing Rs.60 to a supplier whose bill we had not paid (h) Bought additional shop premises paying Rs. 5,000 by cheque. A.Mi#2: Show the effects of the following transactions on different accounting heads in increase/decrease: (a) Bought a motor van on credit Rs. 500 (>) Repaid by cash a loan owed to Pasha Rs.1,000 (©) Bought goods for Rs.150 paying by cheque. (4) The owner puts a further Rs. 5,000 cash into the business (©) A debtor returns to us Rs. 80 goods. We agree to make an allowance for them (Bought goods on credit Rs.220 (3) The owner takes out Rs.100 cash for his personal use (h) We pay a creditor Rs, 190 by cheque. A.M#3: You are to enter the following in the books of Ishaq & Co. (Books of original entries and books of secondary entries): 2008 Aug. 1 Started business with Rs. 1,000 cash 2 paid Rs. 900 of the opening cash into the bank 4 Bought goods on credit Rs.78 from Salman 5 Bought a motor van by cheque Rs. S00 7 Bought goods for cash Rs. 55 10 Sold goods on credit Rs.98 to Dilawar# Chapter -3 12 19 2 24 29 31 JOURNAL, LEDGER AND TRIAL BALANCE (35) Returned goods to Salman Rs. 18 Sold goods for cash Rs. 28 Bought fixtures on credit from King Furnishers Rs, 150 Waheed lent us Rs. 100 paying us the money by cheque. \We paid Salman his account by cheque Rs. 60 We paid King Furnitures by cheque Rs. 150. A.Mi#4: Enter up the following transactions in the records of Ilyas Chemicals and also prepare trial balance: 2009 July u 12 4 25 26 27 Started business with Rs. 10,000 in the bank Tariq lent us Rs. 400 in cash Bought goods on credit from Faheen Rs. 840 and and Saleem Rs. 3,600. Sold goods for cash Rs. 200 ‘Took Rs. 250 of the cash and paid it into the bank Sold goods om credit to Ch. Mehboob Rs. 180 Sold goods on credit to Nawaz Rs. 220. Bought goods on credit from Faheem Rs. 370 Ch. Mehboob returned goods to us Rs. 40. Sold goods on credit to Hameed Rs. 190 and Zia Rs. 320 We returned goods to Faheem Rs. 140 Bought motor van on credit from Master Motors Rs. 2,600 Bought office furniture on credit from Faster Supplied Ltd Rs. 600, We returned goods to Saleem Rs. 110: Bought goods for cash Rs. 220 ‘Goods sold for cash Rs. 70 Paid money owing to Faheem by cheque Rs. 1,070 Goods returned to us by Hameed Rs. 30 Retumed some of office furniture costing Rs. 160 to Faster Supplies Ltd.456) AM #5: AM# 6: 28 29 31 ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 3 Ilyas put a further Rs. 500 into the business in the form of cash Paid master Motors Rs. 2,600 by cheque Bought office furniture for cash Rs. 100 Enter up the following transactions in the book of Gogee Baba Sports and also prepare trial balance: 2009 May 1 au 2 2B 25 28 29 31 Started business with Rs. 2,000 in the bank Bought goods on credit from Chohan Rs. 900 Bought goods on credit from Sheikh Rs. 250 Sold goods for cash Rs. 180 We returned goods to Chohan Rs. 40. Bought goods on credit from Sheikh Rs. 190 Sold goods on credit to Chohan Rs. 390. Sold goods for cash Rs. 210 Took Rs. 300 of the cash and paid it into the bank Bought Machinery by cheque Rs. 50 Sold goods on credit to Malik Rs. 220 ‘Chughtai returned goods to us Rs. 140 Malik returned goods to us Rs. 10 We returned goods to Sheikh Rs. 30 We paid Chohan by cheque Rs. 860 Bought machinery on credit from Rao Rs. 270 You are to enter the following transactions, completing the doubtful entry in the books for the month of May 20x7. Also prepare trial balance. 20x7 May 01 2 03 05 Started business with Rs. 2,000 in the bank and land worth Rs. 10,000. Purchased goods Rs. 175 on credit from Mohsin subject to 20% trade discount. Bought fixtures and fittings Rs. 150 paying by cheque Sold goods for cash Rs. 275Chapter-3 30 3 JOURNAL, LEDGER AND TRIAL BALANCE 137) Bought goods on credit Rs. 114 from Azhar after deducting trade discount of Rs. 6 Paid rent by cash Rs. 15, Bought stationery Rs. 27, paying in cash Goods returned to Mohsin Rs. 22 Let off part of the premises receiving rent by cheque RS. 5. Sold goods on credit to Haroon for Rs. 77 after allowing him trade discount of Rs. 3. Bought a motor van paying by cheque Rs. 300. Paid the month’s wages by cash Rs. 117. The proprietor took cash for himself Rs. 44 & goods of Rs. 15 for his personal use A.M#7: Enter the following transactions in double entry. 20x9 July 02 03 05 o7 08 20 21 2B Started business with Rs. 8,000 in the bank. Bought stationery by cheque Rs. 30. Bought goods on credit from Waheed Rs. 900. Sold goods for cash Rs. 180. Paid insurance by cash Rs. 40 Bought machinery on credit from Musharif Rs. 500, Paid for machinery expenses by cheque Rs. 50. Sold goods on credit to Sagib Rs. 320. Goods withdrawn by the owner Rs. 60. Returned goods to Waheed Rs: 70. Paid wages by cash Rs. 70. Paid rent by cheque Rs. 100. Paid a cheque to Waheed for the Balance after deducting Rs. 50 as discount. Received cheque Rs, 200 from Saqib. Paid Musharif by cheque Rs. 500. Bought stationery on credit from Express Ltd. Rs. 80.(58) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter - 3 Sold goods on credit to Nisar Rs. 230. Goods lost by theft Rs. 100, Paid Express Ltd. By cheque Rs. 80. A.M# 8: Write up the following transactions in the records of Dilshad: 2000 Feb. o 02 03 04 05 06 o7 08 Started business with Rs. 3,000 in the bank and Rs. $00 cash. Bought goods on credit ajid Rs, 250, Taugeer Rs. 190; Rehan Rs. 180. Bought goods for cash Rs. 230 Paid rent in cash Rs. 10. Bought stationery paying by cheque Rs. 49. Sold goods on credit; Chiragh Din Rs. 140; Roshan Rs. 100; Ghazi Rs. 240. Paid wages in cash Rs. 80. Goods of Rs. 95 were taken by Dilshad. We returned goods to Taugeer Rs. 60. Paid rent in cash Rs. 10. Roshan returns goods to us Rs. 15 Sold goods on credit to Basheer Rs. 90, Sameer Rs. 130; Tabish Rs. 170. Paid rates by cheque Rs. 130. Paid insurance in cash Rs. 40 Paid rent by cheque Rs. 10 Bought motor van on credit from Wasiq Rs. 600. paid motor expenses in cash Rs. 6. Paid wages in cash Rs. 90. Received part of amount owing from Ghazi by cheque Rs.200. Received refund of rates Rs. 10 by cheque. Paid by cheque Sajid Rs. 250, Taugeer Rs. 130, Wasiq Rs. 600. Charity given in the form of goods Rs. 110 é& Goods of Rs. 24 lost.Chapter-3 JOURNAL, LEDGER AND TRIAL BALANCE (59) QUIZ Question: Write up the following transactions in the books of Talha. Also prepare the trial balance, 20x8 March 01 Started business with cash Rs. 1,500 and bank deposit Rs. 6,000, 02 Bought goods on credit from A. Hassan Rs, 300, subject o 5% trade discount 03 Paid rent by cash Rs. 28. “05 Sold goods on credit to Ehsan Rs. 540 settlement terms being 1/20 . n/30 07 Bought stationery Rs. 15 paying by cheque. 11 Cash sales Rs. 49 14 Goods returned by us to A Hassan Rs. 10 15 Goods given as free sample Rs. 35 & for charity purpose Rs. 80. 17 Skt oda on sre torMoanarie Rs. 29°” 20 Paid for repairs to the building by cash Rs. 18 22 Ehsan returned goods to us Rs. 140 and settled his account in cash. 25 _ Received cash Rs. 27 in full settlement from Musharaf. 27 paid Hassan by cheque Rs. 270 in full settlement. 28 Cash purchases Rs. 125. 29. Bought a motor van paying by cheque Rs. 395. 30 Paid motor expenses in cash Rs. 15. 31 Bought fixtures Rs. 120 on credit from Waseem.Introduction ‘As we have studied earlier that in accounting cycle, the step aftér forimiing trial balance is the preparation of entity’s final accounts / financial statements. Financial statements are a structured representation of the financial position and financial performance of fan entity. The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: i Assets; ii, Liabilities; ili, Eq iv. Income and expenses, including gains and losses; and v. Contributions by and distributions to owners in their capacity as owners; and vi. Cash flows. This information, alongwith other information in the notes, assists users of financial statements in predicting the entity’s fiture cash flows and, in particular, their timing and certainty. Components of financial statements ‘There are five components of financial statements but we will are: cuss only two components here which > Income statement / trading and profit & loss account; > Balance sheet. 2.1 Income statement / Trading and profit & loss account The main objective of preparing the trading account is to ascertain gross profit or gross loss of a business during an accounting period, usually a year. Gross profit or gross loss is the difference between sales proceeds of particular period and the cost of the goods which have been sold in that period. After preparing trading account, the next step is to prepare profit and loss account with a view to ascertain net profit or net loss during an accounting period. The profit and loss account can be defined as a report that summarizes the revenues and expenses of an accounting period to reflect the changes in various critical areas of firm’s operation. Balance of the trading account (gross profit / gross loss) is transferred to the profit and loss account, which is the startirig point of the preparation of this account. That's why, trading account is treated as a sub- section of the profit and loss account. Note: Accounting period means the period for which profit or loss of the business is calculated, It is normally 12 months i.e. a year.(62) ILMI FUNDAMENTALS OF ACCOUNTING. Formats ‘ ‘There are two main formats of trading and profit & loss account which are; 24.1 ” account form ‘Chapter -4 It is a simple and widely used form of trading and profit & loss account. A trading and profit & loss account in “T” account form is divided into two sides. The left hand side represents the debit side (expenses) and the right hand side (incomes) represents the credit side, The items which appear normally in trading and profit &loss account are. given in the specimen, ‘Specimen ABC Ltd. ‘Trading and profit & loss account For the year ended December 31, 2008. Particulars ‘Amount Particulars ‘Amount Rs. Rs Opening stock xxx | Sales XXXX Purchases XXX. Less: Returns xxx | xxXX Less: Returns xwxx| r0exx | Closing stock XXXK Gross profit e/d xox _ | Gross loss c/d XXAX XxX . 2200 Gross loss b/d xxxXX__| Gross profit b/d 200% Salaries xxxx | Discount received XXX | Office rent, rates & taxes xxx _ | Commission received XXX Printing & stationery xxxx | Bank interest XXXX ‘Telephone charges xxxx | Rent income sx Postage & telegram XXX, Insurance . XXXX, Audit fee XXXX Legal charges XXX Electricity charges 2000 Repairs & renewals XXXX Depreciation XXX Advertisement 200K Godown rent XK | Carriage outward XXX, Bad debts XXX. Selling commission XXXX Bank charges XXXX. Interest on loans XXXX. 6 Discount allowed x00 Net profit (Transferred to Net loss (Transferred to capital account) xxxx__| capital account) xx 22004 XX Note: At a time there can only be gross profit or gross loss appears in trading account and there can only be net profit or net loss appears in profit & loss account.Chapter -4 212 FINANCIAL STATEMENTS - BASIC (63) Statement form Other way of presenting trading and|profit & loss account is statement format or thes oir a formats, Now a days, itis more common than “7” aecount format, The items ‘which appear in this format are same as “T” account ‘Specimen ABC Lid. ‘Trading and profit & loss account For The Year Ended December 31, 2008 Particulars ‘Amount [| Amount | Amount | Rs Rs. Rs. Sales 20008 Less: Sales returns (xxxx) | xXx Cost of goods sold: | Opening stock XXXX | Purchases XXX \ Less: Purchases return XxX 200% Less: Closing stock pxx0x) |_(xxx) Gross profit / (Gross loss) XXXX Add: Other incomes: \ Discount received xxx Commission received XXXX, Bank interest \ | ox Rent income } xm | cox Less: All expenses | Salaries xxXX | Office rent, rates & taxes XxX \ Printing & stationer XXXK Telephone charges xe Postage & telegram XXX, Insurance xxOKK ‘Audit Fee 000% Legal charges . XXXK Electricity charges XXXX Repairs & renewals XXX, Depreciation 000% Advertisement XXXX, Godown rent 200% Carriage outward XXX Bad debts xxxx | Selling commission 20K Bank charges XxX Interest on loans 20 Discount allowed rox | (ox) | Net profit / (Net loss) Transferred to capital account ee a(way ILMI FUNDAMENTALS OF ACCOUNTING Balance sheet Chapter-4 A balance sheet is a list of assets and claims over a business at some specific point of time and is prepared from an adjusted trial balance, It shows the financial position of a business by detailing the sources of funds and the utilization of these funds. A balance sheet shows the assets and liabilities grouped. properly classified and arranged in a specific manner. Formats ‘A balance sheet can be prepared in the following two forms: 2.2.1 Horizontal form Under this format, the left hand side lists liabilities of the business as on the last day of the accounting period as well as detail of its capital position, Various assets of the enterprise are listed on the right hand side of the balance sheet. quity & Liabilities Capital Reserves Outstanding expenses Loans Trade creditors Bills payable As on December 31, 2008. ABC Ltd. Balance sheet Amount Assets ‘Amount | Rs, Rs xxx | Land & building XaXX. xxxx__ | Plant and machinery xxxx xxxx” | Furniture & fixtures XXX. | xxxx | Stock AXA | xxxx | Sundry debtors XXXX | xxxx | Bills receivable xxx | Other investments XXX | Government securities XXX | Cash at bank xxxe |_| Cashin hand XXX [sean XXXXX Note-1: Assets of the same class are grouped together. Alll fixed assets together and all current assets together. Note-2: The balance of capital account is calculated as under: Rs. Capital b/d XXX ‘Add: Profit for the period XXX Less: Drawings for the period xxx Capital e/d BAK 2.2.2 Vertical formChapter -4 FINANCIAL STATEMENTS BASIC (65) The vertical form merely involves a re-arrangement of the information shown by a balance sheet presented in horizontal form. The vertical format clearly displays the network of the business to the owner i.e. the capital. This format also displays the amount of investment in the fixed assets and in working capital which is the difference between the current assets and current liabilities. Specimen: Particulars ABC Ltd. Balance sheet As at 31 December 2006 Amount Land & building Plant and machinery Furniture & fixtures Current assets: Stock Sundry debtors Billls receivable Other investments Government securities Cash at bank Cash in hand Reserves Outstanding expenses Loans Trade creditors Bills payable Working capital Net assets employed Financed by: Capital | Add: Net profit Rs. XXX XXXX XXX XXXX XXX, XXXX XXX XXXX XXX XXAX. XXXX XXxx XXX XXXX (Gaon) XXXx Xxx XXX OR(66) ILMI FUNDAMENTALS OF ACCOUNTING: Chapter - 4 ABC Ltd. Balance sheet As at 31 December 2006 Particulars Amount | Amount Rs. Rs. Assets: | Land & building NK Plant and machinery xx Furiture & fixtures 0K Stock xaxx | Sundry debtors wax | | Bills receivable 20x | Other investments Xan | Government securities XXXX | Cash at bank XXAX Cash in hand |__xxxx, KARK Equity and liabilities: Capital XXXX Add: Net profit | aay Reserves ae Outstanding expenses ae Loans Trade creditors won Bills payable xo pay XXXx XXXXX Example-1 MOHSIN puts before you the following trial balance for the year ending 30th June, 2002. a Particulars | pres) [ Capital | Drawings 1.539 - Stock _ 5,760 Debtors & creditors 8,550[ 1,170 Purchases 9,360 | Sales 27,750 ‘Wages & salaries 1,080 | * Trade expenses 1,080 ‘Traveling expenses TIS Furniture 8,700 Goodwill 900 Cash in han 326 Prize distribution - 450, Bank overdraft 600 Total . 38,520 | 38.520 The closing stock was Rs. 1,500 Prepare trading and profit and loss account and balance sheet in the “T” account form,Chapter -4 FINANCIAL STATEMENTS - BASIC (6) _ Hints for students Capital Write in the balance sheet as equit Drawings Ttwill deduct from capital in the balance sheet. Stock itis opening stock and to be written on the debit side of trading account. Debtors & creditors, Debtors are current assets and to be written on the asset side in the balance sheet while creditors are current liabilities and to be written on the liability side in the balance sheet. Purchases. “These are expenses and to be written on the debit side in the trading account. Sales These are incomes and to be written on the credit side in the trading account. Wages & salaries These are direct expenses and to be written on the debit side in the trading, account. Trade expenses Traveling expenses These are Indirect expenses and to be written on the debit side in the profit & loss account These are also indirect expenses and to be written on the debit side in the profit & loss account. Fumiture This a fixed asset and to be written on the asset side in the balance sheet. aren itis a fixed but intangible asset and to be written on the asset side in the balance sheet Cash in hand Tt is a current asset and to be written on the asset side in the balance sheet. Prize distribution "These are indirect expenses and to be written on the debit side in the profit & loss account Tis a current liability and (o be written on the liability side in the balance Trade expenses Traveling expenses Prize distribution account) Net profit (transferred to capital Bank overdraft “ sheet. - _| Solution-I MOHSIN ‘Trading and profit & loss account For the year ended 30" June, 2002 - Particulars Amount Particulars Amount Rs, Rs. ‘Opening stock 5,760 | Sales 27.750 Purchases 9,360 | Closing stock 1,500 Wages and salaries 1,080 Gross profit cid 13,050 Gross profit b/d MOHSIN Balance Sheet As on 30th June, 2002 | Amount Assets [Amount(68) TALS OF ACCOUNTING Chapter -4 | Rs. Rs. } Capital 9,000 Furniture 8.700 Add: Net profit, 10,745 Goodwill 900 19,745 Stock 1,500 Less: Drawings 1,539 | 18,206 | Debtors 8.550 | Cash in hand | 326 Creditors 1,170 Bank overdraft 600 19,976 Example-2 Prepare profit and loss account and balance sheet for the example-| of this chapter in the statement form. Solution-2 MOHSIN. Income statement For the year ended 30% June, 2002 a Particulars Amount | Amount [ Amount Rs. Rs. Rs. Sales 27,750 Less: Cost of goods sold: Opening stock 5.760 Purchases 9,360 | Less: Closi .500)} 7,860 Wages and 1,080 | (14,700) Gross Profit x | Less: All expenses Trade expenses 1,080 Traveling expenses 18 Prize distribution 450 Net profit (Transferred to capital account) MOHSIN Balance sheet As on 30th June, 2002. Particulars ‘Amount | Amount | Amount | Rs. Rs, Rs, Fixed assets: | Furniture 8,700 Goodwill 900) 9,600 | Current assets: | Stock 1,500 | Debtors 8,550 | Cash in hand 326| 10,376 | | Current liabil Credit 9 1,170 | Bank overdraft 600} (1,770) |__8,606 | 18,206 |Chapter 4 FINANCIAL STATEMENTS - BASIC (69) 7 I Working capital Net assets employed financed by: Capital 9,000 Add: Net profit 10.745 | 19,745 Less: Drawings 1,539) a L 18.206 |(70) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 4 PRACTICE QUESTIONS Question #1: On March 31, 2004, the following trial balance was extracted from the books of QAMAR: Particulars DR (Rs) | CR (Rs) Capital - 50,000 Plant & machinery - 80,000 Sales _— 177,000 Purchases a 60,000 Returns 7 1,000 750, Opening stock - [30,000 Discount 7 350 800 | Bank charges 3s Sundry debtors 45,000 Sundry creditors 7 25.000 Salaries 6.800 | Wages — 10,000 Carriage in__ 750 Carriage out 675 Rent, rates & taxes 10,000 ‘Advertisements 2,000 Cash in hand _ _ 7 900 Cash at bank 6,000 Total 253,550 | 253,550 Question #2: Closing stock is Rs. 35,000, You are asked to prepare the final accounts for the year ended March 31, 2004 and the balance sheet as on that date. On 31st December, 2005, the following trial balance was prepared from the books of QAISAR SHARIF. i Particulars — DR(Rs) | CR Rs) Sundry debtors 45,540 Sundry creditors 9,000 Bills receivable - 4,500 | Plant & machinery - 67,500 Purchases: 7 $1,000 “| Capital - 37,000 Freehold premises 45,000 Salaries - 9,900 Wages 12,960 | Postage & stationery zi GH Carriage In 675 Carriage out 7 900 Bad debts 855 Office general charges 7,350 Cash at bank 4,70 [Cash in hand 720Chapter - 4 FINANCIAL STATEMENTS - BASIC yy Bills payable 4815 | Sales 208,530 ‘Opening stock 27,000 Total 303,345 | 303,345 Closing stock is Rs. 30,000. Prepare a trading and profit & loss account for the year ended 31* December, 2005 and a balance sheet as a on that date from the above trial balance. Question #3: Prepare a trading and profit & loss account for the year ended 31 December, 2006 and a balance sheet as a on that date from the following trial balance: Particulars TDR (Rs.) [CR (Rs.) Opening stock 50,600 Purchases & sales 486,200 | 902,000 Sales returns & purchase returns 8,800 | _ 13,200 Discount received 2,420 Wages 47,850 _ Salaries 772,600 Carriage inward 43,010 ‘Advertising expenses 11,220 : Bills receivable & payable 9,900 11,000 Bank loan 165,000 Office equipment 219,670 Land & building 369,600. Sundry debtors & creditors 49,500. 44,000. Rates & taxes 5,830 Office electricity expenses 10,340 Telephone charges _ 4,840 Cash at bank 19,800 Printing & stationery 12,320 Postage & stamps 1,199 Furniture 220,000. Petty cash 231 Stock of stationery 1,320 Insurance premium 3,300 Carriage outwards 13,200. Bad debts 880 Capital 524,590, Total 1,662,21 1,662.21 | 0 0 Closing stock was valued at Rs. 41,800. Question #4: The following is the trial balance of JAHANZAIB on 30th June, 2007: Particulars DR (Rs) | CR (Rs) Capital 8,500. Sundry creditors 10,400(72) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 4 Plant é& machinery Office furniture & fittin ‘Stocks as on Ist July, 2006 vai Sundry debiors Cash in hand Cash at bank Wages Salaries Purchases Sales a Bill payable Bills receivable “1.440 Return inwards 1,860 [Drawings 1,400 | Return outwards 1,100 ent 1,200 Office lighting & heating 160 Tnsurance 1,260 General expenses 200 Baddebts _ 500 _ Discount 1,300 740 Total 117,860 117,860 Closing stock was valued at Rs. 10,400. You are asked to prepare the final accounts for the year ended June 30, 2007 and the balance sheet as on that date.Chapter -4 FINANCIAL STATEMENTS - BASIC (3) ASSIGNMENT MATERIAL A.M# 1: From the trial balance of Khawaja, extracted after one year trading, prepare an Income Statement for AM#2: the year ended 31 December 20x9 and Balance Sheet as on that date. Trial balance as at 31 Dec 20x9 Sales Purchases Salaries Motor expenses Rent Insurance General expenses Premises Motor vehicles Debtors Creditors Cash at Bank Cash in hand Drawings Capital Stock at 31" December, 2009 was Rs. 12,408. DR (Rs. 95.420 16,594 26,740 16,519 8,425 CR (Rs.) 190,576 16,524 From the following trial balance of Vicky after his first years trading, you are required to draw up an Income Statement for the year ended 30 June, 20x9 and a Balance SI Trial balance as at 30 June 20x9 Sales Purchases Rent Lighting and heating expenses Salaries and wages Insurance Buildings Fixtures Debtors Salary expenses Creditors Cash at bank Drawings Vans Motor running expenses Capital heet as on. DR (Rs. 154,870 4,200 530 51,400 2,100 85,000 1,100 31,300 412 14,590 30,000 16,400 4,110 396,012 that date CR (Re 265,900 15,910(7) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter-4 Stock at 30 June 20x9 is Rs. 16,280, AM#3: From the following trial balance of Akmal drawn up on conclusion of his first year in business, draw up an Income Statement for the year ended 31 December 2009 and a Balance Sheet as on that date. ‘Trial balance As at 31 December 20x9 General expenses Business rates, Motor expense Salaries Hysurance Purchases Sales Car Creditors Debtors Premises Cash at bank Cash in hand Capital Drawings DR (Rs) 305 2,400 910 39,560 1.240 121,040 4,300 21,080 53,000 275 325 23.400 220,275 Stock at 31 December 20x9 was Rs, 14,486. AM#4: CR (Rs) 235,812 11,200 23,263 270,235 Prepare Income Statement for the year ended 30 June 20x9 and Balance Sheet as on that date for Ali Shah. The trial balance as at 30 June 20x9 after his first year of trading was as follows: Trial balance As at 31 December 20x9 Equipment rental Insurance Lighting and heating expenses Motor expenses Salaries and wages Sales Purchases Sundry expenses Lorry Creditars Debtors. Fixtures Shop Cash at bank Drawings Capital DR(Rs.) 940 1,804 1,990 2,350 * 48,580 245,950 624 19,400 44,516 4,600 174,000 11,346 44,000 CR (Rs.) 382,420 23,408 194272 600,100Chapter -4 FINANCIAL STATEMENTS - BASIC Stock at 30 June 20x9 was Rs. 29,304. ‘A.M##5: From the following information, draw up the trading account of Hashmi trader for the year ended 3! December 20x9, which was his first year in business. Rs, Carriage inwards 980 Returns outwards . 840 Returns inwards 1.290 Sales 162,918 Purchases: 121,437 Stocks of goods: 31 December 20x9. 11,320 AM#6: From the following trial balance of Agha Khan, draw up Income Statement (trading and profit and’ AM#7: oss account) for the year ended 30 September 20x9, and a Balance Sheet as at that date. DR (Rs.) CR (Rs.) Stock | October 20x9 1,600 Carriage outwards, 2,100 Carriage inwards 3,700 Return inwards 1,540 Returns outwards 3.410 Purchases 188,430 Sales 380,400 Salaries 61.400 Warehouse rent 3,700 Insurance 1356 Motor expenses 1.910 Office expenses 412 Lighting and heating expenses 804 General expenses 245 Premises 92,000 Motor vehicles 13,400 Fixtures and fittings 1,900 Debtors 42,560 Creditors 31,600 Cash at bank 5,106 Drawings 22,000 Capital 68,843 Stock at 30 September 2009 was Rs. 44.780. The following trial balance was extracted from the books of Rose on 30 April 20x9 from it, and the note about stock, prepare his trading and profit and loss account for the year ended 30 April 20x9, und a balance sheet as at that date, ‘Trial balance As at 31 December 20x9 DR(Rs) CR (Rs) Sales 210,420 Purchase 108,680(76) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 4 Stock | May 20x8 9410 Carriage outwards Ls Carriage inwards 840 Retums inwards 4,900 Retums outwards 3,720 Salaries and wages 41,800 Motor expenses 912 Rent 6,800 Sundry expenses 318 Motor vehicles 14,400 Fixtures and fittings 912 Debtors 23,200 Creditors 14,100 Cash at bank 4,100 Cash in hand 240 Drawings 29,440 Capital 18,827 247.067 247,067 Stock at 30 April 20x9 was Rs. 11,290. A.M#8: The following is trial balance of Asad as at 31 March 20x9. Draw up a set of financial statements for the year ended 31 March 20x9. Trial balance As at 31 December 20x9 DR(Rs) CR (Rs.) Stock 1 April 20x8 52,800 Sales ; 267,400 Purchases (Net of returns) 138,892 Carriage inwards 1,350 Carriage outwards 5,840 Wages and salaries 63,400 Business rates 3,800 Communication expenses ‘ 74 Commissions paid 1,930 Insurance 1,830 Sundry expenses 208 Buildings 125,000 Debtors, 45,900 Creditors 24,870 Fixtures 1,105 Cash at bank 31,420 Cash in hand 276 Drawings 37,320 Capital 210,516 5,786 S1L,786 Stock at 31 “March 20x9 was Rs. 58,440.Chapter-4 AM#9: FINANCIAL STATEMENTS - BASIC Mr. Muzammil’s business position at 1 Jul 20x09 was as follows. Stock Equipment Creditor (A Ltd) Debtor (B Ltd) Bank balance During July, 20x9 he: Sold goods for cash ~ pi Sold goods to B limited Bought goods from A Ltd on credit Paid A Ltd by cheque Paid general expenses by cheque B Lid paid by cheque to bank Stock at 31 July 2009 was Rs. 6,200. ‘Required: (a) Open ledger accounts (including capital) at 1 July (6) Record all transactions (©) Prepare atrial balance (d) Prepare Income Statement for the period ! July 20x9 to 31 July 20x9 (€) Prepare a balance sheet at 31 Jul 20x9 5,000 3,700 500 300 300 3,200 600 3,900 3,000 500 300 77)(78) ILMI FUNDAMENTALS OF ACCOUNTING Question: QUIZ Chapter-4 £ Company drew up the following trial balance as at 30 September 2009, You are to draft the trading and profit and loss account-for the year ended 30 September 20x9 and a balance sheet as at that date, Capital Drawings Cash at bank Cash in hand Debtors Creditors Stock 30 September 2009 Van Office equipment Sales Cost of goods sold Returns inwards Carriage outwards Motor expenses Rent Telephone charges Wages and salaries Insurance Office expenses ‘Sundry expenses DR (Rs.) 28,600 4,420 2 38,100 237,336 2,110 2,850 1,490 8,200 680 39,600 745 392 216 467,375 DR (Rs.) 49,675 26,300 391,400 467,375Chapter -5 BANK RECONCILIATION STATEMENT (79) NCILIATION STATEME! Introdui ‘A business concern can open an account with the bank by paying in an initial sum of money. ‘The bank ‘acts as a custodian of spendable funds of business. The customer may deposit money or withdraw it by cheque. Since the bank is the trustee of the customer, the bank provides to its cystomers a “Bank Statement” at regular intervals and on demand. To ascertain the bank balan a concern has two sources of information: i, Cash book (Bank account) maintained by ourselves; and ii, Bank statement provided by bank from their records, Principally, the two balances should be equal and opposite on a particular date. But-usually, these two balances do not agree. The main reason for the difference in balances is owing to the fact that no party intimates the other every time, a transaction takes place. If the two balances are different, then all the facts are brought together to justify the balances, by means of a bank reconciliation statement. Banking transactions Those transactions in which bank is involved, are known as banking transactions. Mostly we make the banking transactions by cheque. a 1 ABC Bank Ltd. ‘Cheque No. Ferozpur road branch Date. 324-A, Model town, Lahore | PAY —— OR BEARER | Amount in Rupees: | Rs. | Account No: 914234 09-07-2008 : 058899 Signature ‘Mode of payment / Receipt ys, there ate too many Ways through which an enterprise can make banking transaction: ig8 are the main modes of payment / receipt: i. Cheque (Bearer or Crossed); ii, Demand draft; ii, Pay order;(80) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter -5 iv, Direct debit (Standing order); v. Debit card; vi. Credit card; vii, Online transfer; Mail transfer (MT); ix. Electronic transfer (ET); or x Telegraphic transfer (TT), 4, Bank reconciliation statement It is a statement which contains a complete and satisfactory explanation of the differences in balances as per cash book and bank statement. The preparation of bank reconciliation statement is not a part of the double entry book keeping system. It is just a procedure to justify the cash book. Some of the items that frequently cause a difference are: i ‘Cheques issued but not yet presented / Un-presented cheques / Cheques drawn but not cashed by parties / Outstanding cheques; ii, Cheques deposited but not yet credited / Un-collected cheques / Un-credited cheques / Deposits in transit / Un-cleared cheques / Cheques lodged but not yet cleared; iii, Bank charges / Interest / Commission not entered in thé cash book; iv, Interest credited by bank but not entered in cash book; ¥. Amount directly deposited into bank by debtors; vi, Direct transfer: vii, Standing order payments; viii, Errors anc omissions in cash book; ix. Wrong debit by bank; * x. Wrong ereit by bank and xi, Dividend directly received by the bank xii, Cheque dishonored (given to the creditor) xiii. Cheque dishonored (received from the debtor) 4.1 Reconciliation items Following are the items whose adjustment will be made by the bank in future, so, for the time being, these will appear in bank reconciliation statement:Chapter -5 42 BANK RECONCILIATION STATEMENT (31) 5 Unpresented cheques ‘These are the cheques which has been issued but not yet presented by third party into the bank for payment. 5.2 Uncollected cheques These cheques have been deposited by us into the bank but not yet cleared and are in clearing proces. 5.3 Wrongly debited or credited by bank ‘These are the mistakes made by bank. There is a possibility that bank credited / debited our account, but actually this transaction has not been incurred with reference to our account. Such erroneous addition / deletion made by bank must be corrected by bank. Adjusting entries (Cash book) Following are the causes for which cash book must be adjusted 42.1 Bank charges Dr: Bank charges Cr: Bank 4.2.2 Interest credited by bank Dr: Bank Cr: Interest income 4.2.3. Amount directly deposited into the bank Dr: Bank Cr: Debtor (Respective debtor) 4.2.4 Transfer payment Dr; Creditor / person to whom credit transfer is made Cr Bank 4.2.5 Standing order payments Dr: Expense / Party Cr: Bank 4.2.6 Errors and omissions made by us It will be rectified accordingly e.g. wrong posting, wrong total, transposition error, etc. 429 jend received / Direct debit Dr: Bank Cr: Dividend Income(82) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -5 4.2.8 Cheque dishonoured (Given to the creditors) Dr Bank Cr Creditor 4.2.9 Cheque dishonoured (Received from the debtors) Dr Debtor Cr: Bank 43 Adjustment in cash book It is the cash book to record all the necessary adjustments. It can also be called updated cash book. Cash book (Bank column only) Particulars R. | Bank | Date Particulars R. | Bank | Rs, Rs. | | Balance b/d XXXX. Bank charges XXXX | Unrecorded incomes x0 Standing order XaXX, | Debtors | xxx Unrecorded expenses xxax | | | Creditors XXX | | | Balance c/d I | _ [exxx Balance b/d: It means clos balance as per previously made cash book i.e. unadjusted balance. Balance e/d: It means balance after adjustments in cash book i.c. adjusted balance. 5. Format of bank reconciliation statement 5.1 When adjusted balance as per cash book is given Rs. Rs, ‘Adjusted balance as per cash book Dr. Cr. Unpresented cheques Dr. ‘Add Less Wrongly credited by bank Dr. ‘Add Less Uncleared cheques Cr. Less Add Wrongly debited cheques Cr. Less ‘Add Balance as per bank statement +vethenCR — +ve then DR svethenDR = -ve then CR 5.2 When balance as per bank statement is given Rs. Rs, Balance as per bank statement Cr. Dr. Unpresented cheques Dr. Less Add Wrongly credited by Bank Dr. Less Add Uneleared cheques Cr. Add Less Wrongly debited by bank : Cr. Add Less ‘Adjusted balance as per cash book ve then DR +ve then CR svethenCR Ve then DRChapter -5 BANK RECONCILIATION STATEMENT (83) 6. Different scenarios of bank recon: 6.1 When cash book balance is given and bank reconciliation has to be made Step 1: In this method, first of all cash book will be adjusted and adjusted balance as per cash book is determined which is adjusted by debiting / crediting relevant entries. Step 2: Once adjusted balance as per cash book is determined, second step is to determine balance as per bank statement by preparing bank reconciliation statement. Example-1 Following is the cash book (Book column only) & bank statement of ABC Ltd. Prepare bank reconciliation statement Cash Book (Bank Column) _ Date ‘articulars R. | Bank | Date Particulars R. | Bank | 2003 Rs. | 2003 Rs Sep-01 | Balance b/d | 2,379 | sep-07 | FAROOQ 583 Sep-05 | ALI 158 | Sep-12 | ASIM 145 Sep-09 | AHMAD. 400 | Sep-30 | Balance c/d | 2,833 Sep-22 | KAMRAN | [3.561] | [3.561 _ Bank statement Particulars DR CR Balance [Rs Rs Rs. Balance b/d CR 2,379 Cheque: FAROOQ 583 CR 1.796 Cheque: ALI 158} CR 1,954 Cheque: AHMAD. 400|/CR 2.354 Bank charges 100 CR 2,254 - Cash Book (Bank column only) Date Particulars | R. | Bank | Date Particulars 2003 Rs. | 2003 Sep-30 | Balance b/d 2,833 | Sep-30 | Bank charges | Sep-30 | Balance c/d | 2,833 Bank Reconciliation Statement o Rs, Adjusted balance as per eash book Dr 2,733 Add: Unpresented cheques Dr 14s Less: Uncollected cheques cr (624) Balance as per pass book / bank statement Cr. 2,254(84) 62 ILMI FUNDAMENTALS OF ACCOUNTING Chapter -5 ‘When balance as per cash book is not given Step 1: Here first of all, adjusted balance as par cash book is determined by preparing bank reconciliation statement, starting from balance as per bank statement. Step 2: Once you have determined adjusted balance as par cash book from bank reconciliation statement, you can also find unadjusted balance as per cash book by preparing cash book. Example-2 Prepare the bank reconciliation statement from the following date as on 31-12-2005, (®) Balance as per the bank statement (DR.) Rs. 13,806 as at 31-12-2005 (ii) Cheque drawn on 31-12-05, not cashed till Jan. 2006, Rs. 4,838, Rs. 1,117 and Rs. 1,389 (iii) Bank Interest on overdraft not entered in cash book. Rs. 2,415 (iv) Cheque received on 31-12-2005 entered in cash book but not cleared till 1" January 2006 Rs, 16,983 and Rs, 2,595 (¥) Cheque received amounting to Rs. 53 entered twice. (vi) BR due on 30-12-2005 was sent to bank for collection on 29-12-2008, it was entered in the cash book forthwith but its proceeds were not credited by bank till 3° January 2006 amounting to Rs. 4,470. (vii) periodic payment by bank for Rs. 120 under standing instructions not entered in the cash book. (viii) Cheque deposited on 31-12-2005 dishonoured but not entered in the cash book Rs. 2,835. Solution-2 - Cash book (Bank column only) Date Particulars | R. | Bank | Date Particulars R. 2005 Rs. | 2005 Balance b/d 8,321 Interest iii Cheque entered twice |v | Standing order vii | Dishonoured cheque | viii | | Balance e/d | [3321 Bank reconciliation statement For the period ended December 31, 2005 Rs. Balance as per bank statement (i) Dr 13,806 ‘Add: Unpresented cheques (4,838 + 1,117 + 1,389) (ii) Dr. 7344 Less: Uncredited cheques (16,938 + 2,595) (iv) Cr. (19,578) BYR not credit (vi) * Cr. 4,470) Balance as per adjusted cash book Dr. 2,898Chapter -5 Question # 1: Question #2: Question # 3: BANK RECONCILIATION STATEMENT _(85) PRACTICE QUESTIONS From the following particulars, prepare a bank reconciliation statement as on 31" December 2001 (a) Balance as per the cash book Rs. 25,450. (b) Cheque deposited but not yet credited Rs, 500. (©) Cheques amounting to Rs. 5,000 were issued but only cheques for Rs. 4,500 were presented, (d) The bank has directly collected dividend Rs. 400 and interest Rs. 300 but this was not entered in cash book. (e) Bank honoured a bill for Rs. 2,000 but the debit note was sent to the trader on 2 January 2002. (Bank charges Rs. 20 were not entered in the cash book. (g) The debit balance for November was shown short in the cash book by Rs. 300. (h) The bank statement revealed that a cheque for Rs. 250 received from a person had been dishonoured but no entry was passed in the cash book. From the following particulars, prepare the bank reconciliation statement. (a) Bank overdraft as per cash book 16200 (b) Cheque deposited as per bank statement but not recorded in cash book 700 (©) Debit side of the bank column casted short 100 (d) A cheque for Rs. 5,000 deposited and collection as per bank statement 4,996 (©) _ Party’s cheque returned dishonoured as per the bank statement 530 (f) Bills collected directly by bank 3,500 (g) Bank charges recorded twice in cash book 25 (h) A bill for Rs. 8,000 discounted for Rs. 7,960 returned dishonoured by the bank (i) Cheques deposited but not yet collected by the bank 2,320 G) Cheques issued but not yet presented 1,250 Prepare a bank reconciliation statement from the following particulars Rs. (a) Balance as per the bank statement 10,000(86) @) io) @ ILMI FUNDAMENTALS OF ACCOUNTING Cheque deposited into the bank but no entry was passed in cash book Cheque deposited but not cleared Credit side of the bank column casted short Insurance premium paid directly by bank under standing order Bank charges entered twice in cash book Cheques issued but not presented into the bank for payment Cheque received entered twice in cash book Bills discounted dishonoured not entered in cash book, Chapter -5 500 1,200 200 600 1,000 5,000Chapter -5 AM#I: AM#2: AM#3: BANK RECONCILIATION STATEMENT (87), ASSIGNMENT MATERIAL Prepare a Bank Reconciliation Statement as at 30th September, 20x8 from the following entries in the Bank Column of the Cash Book and the corresponding Bank Statement. Cash Book (Bank Column only) 20x8 Sep-1 Balance bf. 16 23 21 30 Raja Kamran Rashid Rao Nadir Rahim Rauf Rao Nisar Umair 20x8 Particulars Sep-1__ Balance bf Cheque-Drawings Cheque-Raja Kamran Cheque-Suleman Cheque-Rashid Cheque-Salary Cheque-Saleem Cheque-Rahim Dividend Received Bank Charges Electricity Bill Cheque-Commission Rs. 8,000 2,200 1,500 3,400 2,600 100 350 18,150 20) Se} 8 12 16 18 21 26 30 30 x8 p-4) Drawings 700 Suleman 3,300 Salary 2,800 Saleem 1,700 Ahmad 4.200 Sana 2,000 Sarwar 1,100 ‘Commission 100 Balance carried over 2.250 18,150 Bank Statement Debit Credit Balance (Cr.) Rs. 700 7,300 2,200 9,500 3,300 6,200 1,500 7,700 2,800 4,900 1,700 3,200 2,600 5,800 900 6,700 15 6,685 60 6,625 100 6,525 ‘The following information has been extracted from the accounting records of the four companies: Balance as per bank statement Deposits in transit Outstanding cheques Balance as per books Required: a 600 1,500 3,600 Rs. Rs. 9,200 275 2,200 b 50 125 1,000 c 15 9.400 225 d Compute the correct amounts to replace missing figures in the above table. ‘The accountant of the Happy Home School Fund is attempting to reconcile the balance shown in the cash book with that appearing on the bank statements, Act ding to the cash book the balance at the(88) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter -5 bank as at May 31, 20x8 was Rs. 19,000 whilst the bank statement disclosed an overdrawn amount of Rs, 4,700. Upon investigation, the Accountant identified the following discrepancies: 1) A cheque paid to Summer Limited for Rs. 3,400 has been entered in the cash book as Rs. 4,300. 2) Cash paid into the bank for Rs. 1,000 had been entered in the cash book as Rs.900. 3) _A transfer of Rs. 15,000 to the Midlands Savings Bank had not been entered in the cash book. 4) A receipt of Rs.100 shown on the bank statement had not been entered in the cash book. 5) The cash book balance had been incorrectly brought down at July 1, 20x7 as a debit balance of Rs, 12,000 instead of a debit balance of Rs. 11,000. 6) Bank charges of Rs. 200 do not appear in the cash book 7) Receipts of Rs. 9,000 ‘paid into the bank on May 31, 20x8 did not appear on the bank statement until June 1, 20x8, 8) Asstandii ig order payment of Rs. 300 had not been entered in the cash book. 9) A cheque of Rs.500 previously received and paid into the bank had been returned by the subscriber's bank marked ‘account closed’ 10) The bank received directly Rs. 1,000 from an anonymous subscriber. 11) Cheques paid into the bank had been incorrectly totalled. The total amount should have been Rs, 1,700 instead of Rs. 1,500. Required: i) Correct the errors in the cash book. ii) Prepare a bank reconciliation statement as at May 31, 20x8. On December 31, 20x8, the bank column of Salim’s cash book showed a debit balance of Rs. 4,610. On examination of the cash book and bank statement you find that: 1) Cheques amounting to Rs. 6,300 which were issued to creditors and entered in the cash book before December 31, 20x8, were not presented for payment until after that date. 2) Cheques amounting to Rs. 2,500 had been recorded in the cash book as having been paid into the bank on December 31, 20x8, but were entered in the bank statement on January 1, 20x9. 3) A cheque for Rs. 730 had been dishonoured prior to December 31, 20x8, but no record of this fact appeared in the cash book. 4) _A dividend of Rs. 380 received direct into the bank had not been recorded in the cash book.Chapter -5 BANK RECONCILIATION STATEMENT (89) AMES: 5) Bank interest and charges amounting to Rs. 420 had been charged in the bank statement but not entered in the cash book. 6) No entry had been made in the cash book for a trade subscription of Rs. 100 paid by pay order in November, 20x8. 7) ~ Charges for cheque book Rs. 10 had been entered in the cash book twice. 8) _A cheque for Rs. 270 drawn by Salam had been charged to Salim’s bank account in error in December, 20x8. You are required: a) to make appropriate adjustments in the cash book bringing down the correct balance, and b) _ to prepare a statement reconciling the adjustment balance in the cash book with the balance shown in the bank statement. From the following particulars ascertain the balance, by means of a statement, that would appear in the Bank Statement of Mr. Rafique as at 31st December, 20x8: Rs, 1. Overdraft as per cash book (On 31st December, 20x8) 7.190 2. Interest on overdraft for 6 months ending 31st December, 20x8 not yet entered in cash book 160 3. Bank charges for the above period not yet ended in cash book. 70 4. Cheques drawn but not cashed by the customers prior to 31st December, 20x8 1270 5. Cheques paid into the Bank not cleared before 3 1st December, 20x8 2,210 6. Deposited cheques returned dishonoured on 31st December, 20x8 600 Also show the amount at the Bank that will figure in Balance Sheet as on 31" December 20x8.(90) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -5 QUIZ Question: In preparing its bank reconciliation at June 30, 20x8, Carefull Company has available the following data: Rs. i) Balance as per bank statement June 30, 20x8 38,025 ii) Deposit in transit June 30, 20x8 5,200 iii) Outstanding cheques June 30, 20x8 6.750 iv) Amount erroneously credited by bank to Carefull’s account June 28, 20x8 400 ¥) Bank service charges for June not yet recorded in cash book 15 Required: Workout Carefuli Company's adjusted cash Balance in Bank at June 30, 20x8Chapter -6 PROVISIONS & DEPRECIATION (ON Provision Sales and purchases of goods on credit basis is one of the marketing techniques in this modern business era and these are different from cash sales and cash purchases. Therefore, new issues arise like bad debts, discount for debtors on early payment and discount received from creditors by paying them earlier than the deadline. As financial statements are prepared by applying some basic accounting concepts like accrual and prudence. So, we have to calculate exactly what amount of bad debt or discount will incur in future but practically it is very difficult to reach at exact amount. Therefore, to recoup up with this problem, the concept of provisions / reserves evolves. Provision associated with debtors Normally two kind of provisions are made for debtors which are provision for doubtful debts and provision for discount on debtors. Now we shall discuss them one by one. 2.1 Provision for doubtful debts ‘At the end of each accounting period, the firm knows that it will suffer a loss due to bad debts in future. An accurate estimate of the apprehended bad debt losses can nevertheless be made, because the firm does not know which debtor will fail to make payment in future. Towards the endeavor of ascertaining the true (or fair) trading profit, a portion of the profit is set aside in a special account called “provision for doubtful debts” to adjust the loss of future bad debts which is based on approximations. The estimate of doubtful debts (provision for doubtful debts) is shown as a deduction from the debtors in the balance sheet. First of all, it will be more convenient for us to know why the bad debts occur. 2.1.1 What are bad debts and why they a ‘Bad debt is an amount owing from a debtor who is expected not to be recovered”. Bad debt is a kind of operating loss due to non-payment from debtor. We know that debtor is a person who has to pay to the entity against goods purchased or services taken by him. Now there is a question. If we know that there is probability of bad debts then why we sell or render services on credit basis? Answer to this question in modern era of business is quite simple, We know that, now-a- days, there is huge competition among different entities regarding their goods and services and their main objective is to boost up the sales and increase their clientage. Credit sales are one of the tools to capture the customer attention. Customer gets the desired goods and fulfills his current need, no matter whether he has money now to pay it oF not ‘On the other hand, credit sales also has greater profit margin than routine cash sales. Some margin is to cover up additional administrative work and debt collection charges and some is for extra profit.(2) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 2.1.2 213 Estimation of provision for doubtful debts The extent of non-payment of debt varies from industry to industry. There are three methods of estimating Bad Debts to be provided for: a Debt review When the size of the organization is small and the accountant has first hand knowledge of the financial condition of all the debtors, then this method of estimating the bad debt is most effective. Under this method, an analysis sheet is, prepared by considering each individual debt. In the analysis sheet, debts are classified into: > Good Debts > Doubtful Debts Provision is made of the amount equal to the aggregate of doubtful debts Probability of non-collection When the size of the organization is very large and the number of customers is numerous, then it is not possible to predict which individual customer will fail to pay in future. In such a situation, it is possible to make an analysis of past recovery from debtors and up probability that some proportion of debtors will fail to pay. Applying this probability to the amount of debtors outstanding at the end of the period, the estimated bad debts can be obtained. Percentage of sales: Another method of estimating bad debts is based on sales. Under this method, a certain percentage of sales is considered to become bad and provision is created on that basis. The percentage is calculated on net sales i.e. sales minus returns and allowances. Accounting entries Following are the main accounting entries: Credit sales made Debtors Sales (Credit sales recorded) Payment received from debtors Cash / Bank Debtors ‘Payment received from debtors}Chapter -6 PROVISIONS & DEPRECIATION (93) Bad debts incurred / Actual bad debts / Debtors written off In the absence of provision for doubtful account, Bad debts. Debtors (Bad debts recorded) __ In the presence of provision for doubtful account Provision for bad debts Debtors (Bad debts recorded) Creating of provision . Bad debts Provision for bad debts (Provision is created) Closing entry for Bad Debts transferred to profit and loss Profit & Loss Bad debts (Bad debts transferred to profit & loss account) _ Example-1 The outstanding debtors of A at the end of his 1* year’s trading on 31-12-99 amounted to Rs, 50,000. A review of the debtor’s list on the same date revealed that was a long over due of Rs. 3,000 from a debtor, the collection of which was considered doubtful. Show relevant journal entries: i, If he decides to write off the balance due form the debtor as bad debt. ii, If he decides to make a provision of Rs. 1,500 for the debr. Solution-1 Journal entries [Date Particulars LF DR | CR Rs, Rs, i. | Bad debts 3,000 Debtors 3,000 (Bad debts recorded) | Profit & Loss 3,000 Bad debts, 3,000 (Bad debts transferred to profit & loss account) _ ee | ii, [Bad debts 1,500 Provision for bad debts 1,500 (Bad debts recorded)(4) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 | Profit & Loss 1,500 Bad debts 1,500 | (Bad debts transferred to profit & loss | account) J Example-2 Following are the balances taken from the Trial Balance of a trader as on 31-12-09; Provision for bad debts — Rs. 10,000; Sundry Debtors ~ Rs. 180,000; Bad Debts ~ Rs. 7,000. You are required to pass journal entries and prepare provision for bad debts account and bad debts account after considering the following: (i) Further bad debts to be written off Rs. 20,000 (ii) Provision for bad debts to be created @ 10% on closing debtors. Solution-2 General journal Date Particulars LF | DR CR Rs Rs i. | Provision for bad debts , } 20,000 Debtors 20,000 (Bad debts incurred) | | ii. [Bad debts 26,000 Provision for bad debts (Provision for bad debts created) Provision for bad debts Date | Particulars | R. | Amount | Date | Particulars | Amount | Rs. Rs Debtors | 20,000 Balance b/d 10,000 | Balance cid | 16,000 Bad debts 36,000 _ Bad debts Date | Particulars | _R. | Amount | Date | Particulars [ R. | Amount | Rs, Rs, Balance b/d | 7,000 Profit & loss 33,000 Provision 26,000 | 33,000] «|. Example-3 Mr. KHAN a trader, had incurred a loss of Rs. 6,000 as bad debt during the year 1998, and then decided to create a provision for bad and doubtful debts at 5% on debtors amounting to Rs. 100,000 on 31* December, 1998, During the year ended 31" December. 1999, the bad debts loss was Rs, 4,000. On 31% December, 1999, his debtors amounted to Rs. 130,000 and decided to maintain the provision for bad and doubtful debts at 4%,Required: Prepare ledger accounts for bad debts and provision Solution-3 PROVISIONS & DEPRECIATION (95) for bad and doubtful Bad debts Date | Amount | Date ‘Amount | 1998 Rs, | 1998 Rs. 31.12 | Debtors 6,000 | 31.12 11,000 31.12 1999 | 1999 31.12 | Provision 31.12 4,200 Provision for bad di lebts [Date Amount | Date | Amount | [1998 Rs, | 1998 Rs. | 31.12 §,000 | 31.12 5,000 5,000 a 1999 1999 - 31.12 4,000 | 01.01 | Balance b/d 5,000 31.12 5,200 | 31.12 | Bad debts [9.200 Specific bad debts and general bad debts Now we will discuss the concept of specific and general borrowing one by one. Specific bad debts will get only the amount ad General bad debts Mr. A due to heavy losses in business has gone to liq 50,000 debt to our company but now it is expected that only 0.20 Rs. will be recovered against Re. 1. So, a provision regarding him is required. Debtors about whom we know specifically that they will become bad and we ted by them or directed by court. Against these debtors, specific provision is created separately from other debtors. lation. He owes Rs. In this case, Mr. A will be treated separately from other debtors. We will recognize a provision of Rs. 40,000 (50,000 x 0.8) will be recognized against his Within hundreds of debtors, it is very difficult to assess each and every debtor whether he will pay the complete debt or not and what portion will be going to(96) 2.2 ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 become bad, In this case a general provision against debtors is created based on past experience. Example-5 ABC Ltd. In a multinational company the outstanding balance of its debtor is Rs. 5,000,000. From past experience, it has been estimated that 5% of these debtors, will be going to bad. So, you are required to create a provision against them? Solution-5 In this particular case it is clear that 5% of these debtor will go bad so a provision of Rs. 250,000 (5,000,000 x 5%) will be recognized in the books. Provision for discount on debtors Ina sale transaction, payment is made either at the point of sale or after a specified period of 1e. Since many sellers offer cash discount if payment is made early in a specified period of ie. Cash discounts allowed are conveniently treated as an expense of the period. Like provision for bad and doubtful debts, it is desirable to reduce the debtors figure by the amount of probable cash discount to be allowed. This is because, customers are always debited with the full amount invoiced at the time of sale, but credited with the discount when they avail it ‘The difficulties, however, are that nobody knows how many debtors will take the opportunity of cash discount, and hence, discount allowed to debtors are less predictive. Therefore, all that is possible is to make a rough estimate based on a percentage of outstanding debtors. A separate “Provision for Discount on Debtors Account” is opened which is very similar to “Provision for Bad Debts Account” The only difference is that provision for discount is calculated on the debtors’ balance after deducting the provision for bad and doubtful debts. It is also shown in the balance sheet as deduction from sundry debtors. Like the treatment of bad debts, the accounting treatment of provision for discount on debtors allowed in the first year is different from the treatment allowed in the 2"! and subsequent years. Following are the main accounting entries: Discount allowed to debtors (1" year) Discount allowed Debtors (Discount allowed to debtors) oe Discount allowed transferred Profit & loss Discount allowed (Discount transferred to profit & loss account) When provision is created Discount allowed Provision for discount on debtors (Provision is created for discount on debtors)Chapter - 6 PROVISIONS & DEPRECIATION 7) Discount allowed to debtors (2° or subsequent year) Provision for discount on debtors Debtors Discount allowed to debtors) Example-6 The sundry debtors adjusted balance at 31-12-04 were Rs. 20,000. A provision for bad debts @ 4% was made and also a provision for discount on debtors @ 5% was required. The discount allowed during the year amounted to Rs. 700. The business was commenced on 01-01-04 Required: Pass journal entries; and prepare bad debts account, provision for bad debts account, discount allowed account and provision for discount allowed on debtors account. Also show how they appear in the profit & loss account and in the balance sheet, Solution-6 General journal Date[ Particulars: LF [DR CR Rs. Rs. | Bad debts 800 Provision for bad debts 800 (Provision is created for bad debts) Discount allowed 960 Provision for discount on debtors 960 (Provision for discount on debtors is created) Profit & loss 2,460 Bad debts | 800 Discount allowed 1,660 (Bad debts and discount transferred to profit & loss, account) 7 General ledger Bad debts Date | Particulars | R. | Amount | Date | Particulars | R. | Amount 2004 Rs, 2004 | Provision 800 | Dec-31 | Profit & loss 800 | | Provision for bad debts : Date | Particulars Amount | Date__| Particulars | _R._| Amount 2004 Rs, 2004 Rs Dec-31 | Balance c/d |___ 800 Dec-31 | Bad debts 800 800 [800(98) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter-6 Discount allowed Date | Particulars | R. | Amount | Date | Particulars ‘Amount | 2004 | Rs. 2004 Dec-31 | Debtors | 700 | Dec-31 | Profit & loss Dec-31_| Provision 960. | 1,660 Provision for discount on debtors Date | Particulars | R. | Amount | Date | Particulars | R. 2004 Rs, 2004 Dec-31 | Balance c/d | 960 | Dec-31 | Discount al. 960 Profit & loss account Amount Particulars ‘Amount Rs, Rs. Bad debts 800 | Discount allowed 1,660 , 2,460 Balance sheet As on December 31, 2004 Liabilities ‘Amount Assets, ‘Amount Rs. Rs Sundry debtors 20,000 Less: Prov. for bad debts (800) Less: Prov. for discount (960) | _18.240 18,240 2.3 Recovery of bad debts After writing off any bad debt, if any amount is received from that customer in respect of the written off debt, itis called recovery of bad debt. Followings are main accounting entries: Bad debt recovered Bank Bad debts recovered (Bad debts recovered) a Bad debts recovered transferred to profit & loss account Bad debts recovered Profit & loss (Bad debts recovered transferred to profit & loss account) 24 Notes If following wordings are given in the statement for creation of provision then the statement will be taken as the information about the closing balance of particular provision:Chapter - 6 PROVISIONS & DEPRECIATION (99) > Provisions should be made... > Provision is to be increased'to > Provision is to be maintained to / at Provision is to be created to, Provision is to be reduced to. \ > _ Provision is to be required to / Provision is required > Provision is to be adjusted to. > Provide for bad debts... IF following wordings are given in the statement for creation of provision then the statement will be taken as the information about the increase / decrease in particular provision i.e. amount of entry to be passed: : > Provision is to be increased by... > Provision is to be adjusted by. > Purther provision. > Provide for further bad debts. 3. Depreciation Depreciation is the process of allocating the cost of a fixed asset (less any residual value) over its estimated useful life in a rational and systematic manner. It is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, efflux ion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period over the expected useful life of asset. 4. Causes of depreciation As an asset is used over the years, the benefits embodied within it decrease. The ‘bundles of future series’ available from it become smaller and smaller as the years pass because of the following two factors: 1 Physical factors, such as deterioration through use; and 2. Economic factor, such as impaired utility through obsolescence. Therefore, decline in service potential or decline in value during the life of an asset is the result of: 1 Decay or deterioration from wear and tear, time and the elements; and. 2. Ordinary obsolescence arising from technological improvements and the inadequacy of the asset for its intended purpose.(100) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter - 6 From the above, it can be comprehended that the causes of depreciation arise directly through deterioration or indirectly through obsolescence. Factors in the measurement of depreciation Following are the main factors which keep in mind at the time of calculating depreciation: Sa 33 Cost of asset Itis the basis for all subsequent accounting for that asset. Generally, the cost of an asset means its acquisition cost, which is the sum of all costs incurred in acquiring the asset, and all direct expenses i.e., incidental costs involved in bringing the asset into condition as intended by ‘management. When the business concern itself manufactures some assets, the cost of an asset will mean its production cost. Residual value or scrap value of asset It is the estimated value of an asset that an entity expects to receive at the time of removal and disposal. Mainly it is estimated to get the exact amount of asset (depreciable amount) that will be consumed by the entity in future years. Useful life of asset It is the number of accounting periods for which asset will be useful to the business. Basic objective of estimating the useful life of an asset is to allocate the net cost of the asset (depreciable amount) over its useful life by means of depreciation. Since there is no way to measure correctly how long an asset will be useful, the asset’s useful economic life is always estimated at the star. It is generally based on the following: i Extent of use (as in plant, machinery, ete); ii, Consumption or extraction (as in mines); iii, Physical deterioration (physical process of wear and tear); and iv. Obsolescence (loss of usefulness through technological or market changes). The estimated useful life of an asset may be expressed in terms of the following: i Time (e.g. a certain number of years); Units of output (e.g. a predetermined quantity 0. output); or iii, Operating Periods (e.g. a certain number of working hours), Methods of caleulating depreciation Followings are the main methods of culating depreciation:Chapter -6 PROVISIONS & DEPRECIATION (ory SAL Straight line method This is the most popular method because of its simplicity and consistency. In this method, a fixed proportion of asset’s cost is charged in that accounting period in which it is being used. The rate of depreciation is the reciprocal of the estimated useful life l Rate of depreciation = ——— x 100 - % Useful life Note: Depreciation rate is applied on depreciable amount of the asset and formula for calculating depreciable amount is Depreciable amount = Cost of asset ~ Residual value “oR” We can also use a direct formula for calculating depreciati The formula is: non straight line method. Cost of Asset - Residual value Estimated useful life Annual depreciation = Example-7 Cost of an asset is Rs. 300,000 and its residual value after the end of its useful life is Rs. 50,000. The useful life is 5 years. You are required to calculate the depreciation expense for all the five years on straight line method. Solution-7 Firstly, we calculate the rate of depreciation. Rate of depreciation = et CO Usefial life = +x100 5 = 20% Now, we calculate the depreciable amount. Depreciable amount = Cost of asset ~ Residual life = 300,000 ~ $0,000 = 250,000 So, the annual depreciation is: Annual depreciation = 250,000 x 20%(102) 54.2 ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 = 50,000 Alternatively Cost of Asset - Residual value Annual depreciation Estimated useful life 300,000 50,000 s = 50,000 Diminishing balance method Under this method, instead of a fixed amount, a fixed rate on the reduced balance of the asset is charged as depreciation every year. Since a constant percentage rate is being applied to the written down value, the amount of depreciation charge every year decreases over the life of the asset. This method assumes that an asset should be depreciated more in the earlier years of use than later years because the maximum loss of an asset occurs in the early years of use. Depreciation rate is calculated by using the following formula: aa e n = expected useful life in years s = scrap value e = acquisition cost r = rate of depreciation ‘Note: Depreciation rate is applied on book value of the asset. Book value = Cost— Accumulated depreciation Example-8 Cost of an asset is Rs. 300,000 and its residual value after the end of its useful life is Rs. 50,000. The useful life is 5 years. You are required to calculate the depreciation expense for all the five years on diminishing balance method. Solution-8 Firstly, we calculate the rate of depreciation.Chapter -6 3.43 PROVISIONS & DEPRECIATION (103) = 0.6988 = 03012 Depreciation = Book value x Rate of depreciation Year-1 Depreciation = * (300,000 ~0) x 0.3012 = 90,360 Year-2 Depreciation = (300,000 ~ 90,360) x 0.3012 = 63,144 Year-3 Depreciation = (300,000 ~ 153,504) x 0.3012 = 44,125 Year-4 Depreciation = (300,000 ~ 197,629) x 0.3012 = 30,834 Year-5 Depreciation = (300,000 ~ 228,463) x 0.3012 = 21,547 Sum-of-years’ digi od ‘This method assumes that depreciation charge should be more in the early years of life of the asset. It allocates approximately two-third of the cost in the first half of the assets estimated economic life. Depreciation expense is computed as follows: Sum of years’ digits n = estimated useful life Depreciation = - BENG SINCE ea fa) Sum of years digits Example-9 Cost of an asset is Rs. 100,000 and its residual value after the end of its useful life is Rs. 20,000. The useful life is 4 years. You are required to calculate the depreciation expense for all the four years on sum-of-years’ digit method.(104) 5.4.4 ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 Solution-9 Sum of years’ digits med Sum of years’ digits = — Sum of years" = 10 Depreciation Sete (Cost-R.V) Year-I Depreciation re (100,000~20,000) = 32,000 Year-2 Depreciation = a (100,000-20,000) = 24,000 Year-3 Depreciation = = (100,000 20,000) = 16,000 Year-4 Depreciation = a (100,000-20,000) = 8,000 ‘Machine hour rate method This is a method of providing depreciation proportionately on the basis of machine hours worked in each year compared with anticipated machine hours over the life of the machine. Here, it is necessary to estimate the total effective working hours during the whole life of the machine and to divide this total into the net cost of the machine and thus arriving at an hourly rate of depreciation, Cost—Residual value Machine hours rate = os Example-10 Cost of an asset is Rs. 100,000 and its residual value after the end of its useful life is Rs. 20,000. The effective working hours for the whole life of asset is 10,000 hours. You are required to calculate the depreciation expense for the first year if asset is used for 3,000 hours in the first year.Chapter 6 5.4.5 PROVISIONS & DEPRECIATION (105) Solution-10 Cost — Residual value Dep. per machine hour Effective Working Hours 100,000 - 20,000 10,000 Dep. for first year 3,000 x 8 = 24,000 Under this method, annual production is compared with total anticipated production over the life of the machine to calculate depreciation rate in the following ways: Cost Anticipated Total Production Dep. rate perunit = Example-1 Cost of a machine is Rs. 100,000 and its residual value after the end of its useful life is Rs, 20,000. The anticipated total production of machine is 5,000 units. You are required to calculate the depreciation expense for the first year if machine is produced 2,000 units in the first year. Solution-11 Pitt Cost—Residual value Anticipated Total Production 100,000 5,000 000 = 16 Dep. for first year 2,000 x 16 = 32,000 5.5. Depreciation policy It means time period in a year for which depreciation is computed and charged to profit and loss account,(106) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 5.5.1 Time basis Under this method, exact number of days during which an asset is used, are computed and depreciation is charged for such days. 5.5.2 Full year basis Under this method, full year depreciation is charged in the year of purchase irrespective of the date of purchase, while no deprecation is charged in the year of disposal, 5.5.3 Monthly bi Under this method, depreciation is charged on monthly basis. If an asset has been in use ‘or more than 15 days in a month, depreciation for whole month is charged. If asset has been used for less than 15 days, no depreciation is charged for that month 5.5.4 Reversal of full year basis This policy is reversal of ‘Full Year Basis’. In this policy, no depreciation is charged in the year of purchase while full year’s depreciation is charged in the year of disposal Example-12 ‘An asset is purchased on 10 September 2008 for Rs. 100,000. Books are closed on 31% of December. You are required to calculate the depreciation expense for 2008 using straight line method assuming all the above mentioned basis one by one. The rate is 10 % per annum, Solution-12 ime basis Depreciation 100,000 x 10% x. 1B 100,000 x 10% x 365 3,096 Full year basis Depreciation 100,000 x 10% = 10,000 Monthly basis Depreciation 100,000 x 10% xChapter -6 PROVISIONS & DEPRECIATION (107) Reversa®f full year No depreciation will be charged in the year of purchase. 5.6 Method of recording depreciation We ean record the depreciation in any of the following ways: 5.6.1 When no ‘Provision for Depreciation Account’ is maintained i, Dr: Depreciation Cr: Asset ii Dr. Profit & loss Cr. Depreciation 5.6.2 When ‘Provision for Depreciation Account’ is maintained i Dr. Depreciation Cr. Accumulated depreciation ii, Dr. Profit and loss Cr. Depreciation Example-13 REHMAN purchased a plant for Rs. 180,000 on 1* January 2002. Its probable working life was estimated as 10 years and its probable scrap value at the end of that time is Rs. 20,000. It was decided to write off depreciation by straight line method. It was decided to close books each year on December 31, Pass necessary journal entries for first two years. (a) When no ‘provision for depreciation account’ is maintained. (b) When ‘provision for depreciation account’ is maintained. Solution-13 (2) When no ‘provision for depreciation account’ is maintained. “ Books of REHMAN General journal a Date 2 Particulars [ur fpr | cr 2002 | [Rs Rs Jan-01 | Plant | 180,000 Bank | 180.000 (Plant purchased) _ | j Dec-31 | Depreciation | 16,000 | | Plant (W-1) 16,000 | (Depreciation charged for plant) Se. | Dec-31 | Profit & Loss 2 16,000 ! Depreciation 16,000 | (Depreciation transferred to profit & loss account) | |(408) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 2003 Dec-31 | Depreciation 16,000 Plant (W-1) | 16,000 | (Depreciation charged for plant) _ Dec-31 | Profit & Loss 16,000 | Depreciation (Depreciation transferred to profit & loss account) Total (b) When ‘provision for depreciation account’ is maintained Books of REHMAN _ _ General journal _ Date Particulars LF [DR cR 2002 Rs. Rs. Jan-O1 | Plant 180,000 Bank 180,000 (Plant purchased) | Dec-31 | Depreciation (W-1) 16,000 | Accumulated depreciation 16,000 (Depreciation charged for plant) | Dec-31j Profit & Loss 16,000 Depreciation | 16,000 | ue (Depreciation transferred to profit & loss account) | | 200: | Dec-31 | Depreciation (W-1) | 16,000 | Accumulated depreciation 16,000 (Depreciation charged for plant) Dec-31 [Profit & Loss 16,000 | Depreciation | 16.000 (Depreciation transferred to profit & loss account) _| Total | (000 | _244,000 | Working notes (w-l) 180,000-20,000 10 Annual depreciation = Rs, 16,000 Fxample-14 RAHIM purchased machinery by cheque for Rs. 200,000 on 1* July 2000. The estimated scrap value of the machinery is Rs. 40,000. At the end of each year, depreciation is provided at the rate of 10% per annum by the reducing balance method. Show Machinery Account for the first two financial years which is ending on 30 June every year. Provision for depreciation account is maintained,Chapter -6 PROVISIONS & DEPRECIATION (109) Solution-14 Machinery oe Date | Particulars [R. [Amount | Date | Particulars | _R._ | 2000 Rs. 2001 | Jul-Ol | Bank 200,000 | Jun-30 | Balance e/d |. 200.000 200,000 200.000 | 2001 2002 Jul-01 | Balance b/d 200,000 | Jun-30 | Balance c/d 200.000 | 200,000 200.000 Accumulated depreciation Date | Particulars | R. | Amount [Date | Particulars | _R. | Amount 2001 Rs 2001 Rs. Jun-30 | Balance /d 20,000 | Jun-30 | Depreciation 20,000 | 20,000 2001 Jul-01 | Balance b/d 20,000 2002 2002 | Jun-30 *| Balance e/d 38,000 | Jun-30 | Depreciation 18,000 38,000 [38,000 Depreciation _ [_ Date | Particulars [ R. | Amount | Date | Particulars 2001 Rs. 2001 Jun-30 | Acc. Dep. 20,000 | Jun-30 | Profit & Loss 20,000 2002 2002 Jun-30 | Ace. Dep. Jun-30._ | Profit & Loss Working notes “ (wel) Depreciation for 2001 200,000 x 10% 20,000 Depreciation for 2002 (200,000 - 20,000) x 10% 18,000(110) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -6 Question # 1: Question #2: Question #3: PRACTICE QUESTIONS Mr. ATTIQUE started business on 01-01-2000, year ended 31 December. Following is the information provided for the Year 2000 2001 2002 Credit sales 100,000 140,000 200,000 Received from debtors 60,000 100,000, 100,000 Discount allowed 10,000 14,000 12,000 Return Inwards 6,000 4,000 46,000 Bad debts. 4,000 12,000 2,000 Provision is to be created for doubtful debts @ 10% on closing debtors. You are requifed to prepare sundry debtors account, bad debts account,and provision for bad debts account, ‘year 2000 to 2002. for the ‘You are given the following balances on 1* January’2003; Debtors ~ Rs. 20,000; Provision for doubtful debts ~ Rs. 800. Sales for the year 2003 (all on credit): Rs. 200,000; Sales return for the year 2003 — Rs, 2,000; collection from debtors during 2003, - Rs. 180,000; Bad Debts written off during 2003 ~ Rs. 1,000; Discount allowed during 2003 — Rs. 800. At the end of 2003 the provision for doubtful debts is required to be 5% of debtors, after making. a specific provision for a debt of Rs. 400 from a customer who has been declared bankrupt. Sales for the year 2004 (90% on credit) ~ Rs. 200,000; Sales return for the year 2004 (90% relating to credit customers) ~ Rs. 4,000; collection from debtors during 2004 ~ Rs.190,000: Debtors balance settled by contra against creditors’ balances during 2004 — Rs. 6,000; Bad debts written off during 2004 (including 50% of the debt due from the customer who had gone bankrupt), other 50% having been received in cash during 2004 — Rs. 3,000; Discount allowed during 2004 ~ Rs. 1,000. At the end of 2004, the provision for doubtful debts is still required to be 5% of debtors. Write up sundry debtors account and the provision for doubtful debis account for the year 2003 and 2004, CHARISMA Lid, makes provision for doubtful debts at the end of each year against specific debtors, ‘On 31 December 2000 the following debtors’ balances were considered doubtful and provided for B ~ Rs. 3,000, C— Rs. 800; D - Rs. 500, Following are the particuldks for the year ended 31* December 2001 (@) Bad debts written off: B — Rs. 2,400; E ~ Rs. 600; D—Rs. 400. (b) Bad debts recovered: R ~ Rs. 1,400; S —Rs. 1,200; N-Rs. 1,000. (©) _ Bad debts considered doubtful at the end of the year: G—RFs. 1,600; H ~ Rs. 1,800: K - Rs. 2,000,Chapter-6 Question # 4: Question #5: Question # 6 PROVISIONS & DEPRECIATION ay Debts considered doubtful at the commencement of the year 2001 were either realized or written off as bad debt. Write up the bad debts account and provision for doubtful debts account for the year ended December 31, 2001 A trader mentioned provision for doubtful debts @ 5%; and a provision for discount @ 2% on debtors, which on 1% January 2002 stood at Rs. 3,000 and Rs, 1,000 respectively. His balances on December 31, 2002 and on December 31, 2003 were: 31-12-02 31-12-03 Bad debts written off 3,600 600 Discount allowed 1,200 400 Sundry debtors 40,000 12,000 Show necessary accounts in the ledger? XYZ is a multinational company engaged in the business of pharmaceutical products. As at December 31, 2007, trial balance of the company shows a debtor balance of Rs. 7,600,000. From past experience company has decided to create a provision against these debtors amounting 5% of the outstanding balance. One of the debtor (Mr. A) of the company whose outstanding balance is Rs. 800,000 goes into liquidation from court proceedings. It has been cleared that 0.25 rupees will be recovered from hhim against Rs. 1. Now you are required to recognize provision in the books of XYZ Lid. * company maintains its fixed assets at cost. Depreciation provision accounts, one for each type of asset, are in use. Machinery is to be depreciated at the rate of 12-1/2 per cent per annum, and fixtures at the rate of 10 per cent per annum, using the reducing balance method, Depreciation is to be calculated on assets in existence at the end of each year, giving a full year's depreciation even though the asset was bought part of the way through the year. The following transactions in assets have taken place: 1985 | January Bought machinery Rs. 640, Fixtures Rs. 100 July Bought fixtures Rs. 200. 1986 1 October Bought machinery Rs. 720. I December Bought fixtures Rs. 50. The financial year end of the business is 31st December, You are to show: (a) The machinery account. (>) The fixtures account. (©) The two separate provision for depreciation accounts. (d) The fixed assets section of the Balance-sheet at the end of each year for the years ended 3st December, 1985 & 1986,ay ILMI FUNDAMENTALS OF ACCOUNTING. Chapter - 6 Question #7: ‘The BOLAN Minerals Lid. leased on June 30, 1993 a manganese or mine for a sum of Rs 500,000. It is estimated that the total quantity of or in the mine is Rs. 100,000 tonnes. The annual output is an follows: Year Tonnes 1993 5,000 1994 20,000 1995 16,000 1996 21,000 Using depletion method of depreciation, show the Mine Account for the above four yearsChapter -6 PROVISIONS & DEPRECIATION (3) AM#I: AM#2: AM#3: ASSIGNMENT MATERIAL Ali Ghalib has total debtors” balances outstanding at 31 December 2007 of Rs. 28,000. He believes, that about 1% of these balances will not be paid and wishes to make an appropriate provision. Before now, he has not made any provision for doubtful debts at all On 31 December 2008 his debtors’ balances amount to Rs. 40,000. His experience during the year has convinced him that a provision of 5% should be made. What accounting entries should Ali Ghalib on 31 December 2007 and 31 December 2008, and what figures for debtors will appear in his balance sheets as at those dates? Mr. Aftab commenced business on January 1, 2005. The following information relates to the first three years of his business. Year to December 31, 2005 2006 2007 Rs, Rs. Rs, Sales (all credit) 458,400 567,600 537,200 Cash received from debtors 355,300 512,700 481,200 Discounts allowed 45,800 47,300 48,600 Specific bad debts to be written off 2,200 4,900 2,500 Provision to be made for doubtful debts 5% 10% . 75% Provision for discount allowable % 2% 2% Required: Write up the following for each of the three years i) Trade debtors account. ii) Provisions for bad debt account. iii) Impact on profit and loss. The trial balance before adjustment for the Sales-multiplier (Pvt.) Limited shows the following balances: Dr. cr. Trade debts 780,000 Provision for doubtful debts 4,500 Sales 6,450,000 Sales returns and allowances 30,000 Give the adjustment for estimated bad debts assuming i) The allowance is maintained at 2 percent of trade debts ii) The allowance is to provide for doubtful debts of Rs. 20,400 arrived at by aging the accounts. iii) The allowance is to be increased by 4 of | percent of net sales.aus ILMI FUNDAMENTALS OF ACCOUNTING _ Chapter -6 A.M#4: Calculate depreciable amount of asset and rate of depreciation from the following. Rates are required to be calculated for straight line as well as reducing balance method, Rs. Cost 100,000 Residual value 20,000 Useful life 4 years For reducing balance method use the formula r tren) Where r = rate of depreciation s = the residual value c = the cost of asset n = the number of years A.M#5: A Ltd, Bought a machinery for Rs. 100,000 from P Lid. on 1 July 2008. Payment is to be made after 3 months, Its residual value is expected to be negligible at the end of useful life. Accounts are closed ‘on 31" December. You are required to: (Calculate depreciation on time basis at the rate of 25% for first three years on: (a) Straight line method (b) Reducing balance method (ii) On what basis would you select one of the two methods for calculating depreciation’ A.M#6: From the data given in A.M # 5 calculate depreciation assuming that full year’s depreciation is charged in the year of addition and no depreciation is charged in the year of disposal using: (@) Straight line method (b) Reducing balance method Also pass journal entry for recording depreciation in the ledger and in the final accounts. How fixed assets would appear in the balance sheet of A Ltd. In all four years,Chapter -6 PROVISIONS & DEPRECIATION (is) Quiz Question # 1: {A portion ofa trial balance of AB Ld. Is given. AB LIMITED: TRIAL BALANCE AS ON 315" DECEMBER 2008 Dr. cr. Debtors 40,000. Provision for doubtful debts. 2,000 Bad debts recovered 1,000 Provide 5 percent on debtors for further bad and doubtful debts. ii) Included in the debtors is an amount of Rs. 100 in respect of insolvent whose estate is expected to realize not more that 50 paisa in the rupee. iii) Included in debtors is an amount of Rs. 400 due from K, who was out creditor also of Rs, 600. iv) Bills received included dishonoured bills of Rs. 650. Out of these bills, there was a bill of Rs. 100, which was due from a certain debtor who was expected to pay a dividend of 25 paisa in the rupee ¥) Sales made on approval basis of Rs, 600 is still pending. The profit included in such goods was at 20% on sales. vi) Sundry debtors included an item of Rs. 2,500 for goods supplied to the proprietor. Rate of profit was the same i.e, 20% on sale. vii) You are required to show what amount will appear in profit and loss account, on account of provision for doubtful debts. Question # 2: The cost of a machine purchased by S. Yaseer Trading Company (Private) L sd on 1* April, 2007 is Rs 750,000. It is estimated that the machine will have a Rs. 30,000 trade-in value at the end of its service life. Its life is estimated at 6 years and total working hours at 25,000. Its production is estimated at 400,000 units, During 2007, the machine was operated for 4200 hours and produced 80,000 units ‘Compute the depreciation on the machine for 2007 by: @) (b) () Service hours method The productive output method and The sum of the years digits methodChapter-7 FINANCIAL STATEMENTS - ADVANCED 17) Introduction In previous chapters, we have already discussed the format of financial statements for trading concern. In this chapter, we shall learn how financial statements of a trading concer entity will be prepared by considering closing adjustments entries. Preparation of financial statements The components of financial statements are different in case of manufacturing and trading concern 2.1 Incase of a manufacturing concern (Not in our syllabus) For a manufacturing concer, the following financial statements are prepared: (Manufacturing account; (ii) Trading and Profit & loss account; and (iii) Balance sheet. 2.2 Incase of a trading concern: For a trading concem, the following financial statements are prepared (Trading and Profit & loss accounts; and (ii) Balance sheet. 3. Explanation of different components Now we will discuss all the components one by one 3.1 Trading and profit & loss account ‘The main objective of preparing the trading account is to ascertain gross profit or gross loss of a business during an accounting period, usually a year. Gross profit or gross loss is the difference between sales proceeds of particular period and the cost of the goods which have been sold in that period. After preparing trading account, the next step is to prepare profit & loss account with a view to ascertain net profit or net loss during an accounting period. The profit & loss account can be defined as a report that summarizes the revenues and expenses of an accounting period to reflect the changes in various critical areas of firm’s operation. Balance of the trading account (Gross profit / gross loss) is transferred to the profit and loss account, which is the starting point of the preparation of this account. That’s why, trading account is treated as a sub-section of the profit and loss account. Note: Accounting period means the period for which profit or loss of the business is calculated. It is normally 12 months ie. a year.(118) ILMI FUNDAMENTALS OF ACCOUNTING Formats There are two main formats of trading and profit & loss account which are: 3.1.1 account form Chapter -7 I is a simple and widely used form of trading and profit & loss account. A trading and profit & loss account in “T” account form is divided into two sides. The lefi hand side represents the debit side (expenses) and the right hand side (incomes) represents the credit side, The items which appear normally in trading and profit & loss account are given in the specimen. Specimen ABC Lt. Trading and profit & loss account For the year ended December 31, 2008 | Amount | Gross loss b/d Administration expenses: | Salaries Office rent, rates & taxes Printing & stationery Insurance | Electricity charges Repairs & renewals Depreciation: | Office equipment Office furniture | Office building Selling & dist. expenses: Salaries (selling staff) Advertisement Carriage outward | Bad debts Selling commission | Financial expenses: Bank charges Interest on loans Discount allowed Loss on sale of machinery Loss on sale of investment Net profit (Transferred to capital account) Particulars ‘Amount __ Particulars Rs Rs, Opening stock xox | Sales XXX Purchases | Less: Returns sows | xXAN Less: Returns xxxx| —xxxx | Closing stock XXXN Gross profit cld [20x | Gross loss ef XXXX Gross profit b/d Discount received Commission received Bank interest Rent income Dividend Profit on sale of machinery Profit on sale of investment XAXX. XXXX XXXX, XXX. XXXX. XXXN XXXXChapter -7 FINANCIAL STATEMENTS - ADVANCED. 19) Note: Ata time there can only be gross profit or gross loss appears in trading account and there can only be net profit or net loss appears in profit & loss account Statement form Other way of presenting trading and profit & loss account is statement format or three columnar format. Now-a-days, it is more common than “T” account format. The items which appear in this format are same as “T” account. ‘Specimen ABC Ltd. Trading and profit & loss account _ For the year ended December 31, 2008, - lars ‘Amount | Amount | Amount i Rs. Rs, Rs, Sales XXAX Less: Sales returns (wax) | xox Cost of goods sold: Opening stock soe Purchases xxx Less: Purchases return cxxxx) | xxv Less: Closing stock (aan) |_(xxxx) Gross profit / (Gross loss) Xx, Add: Other incomes: Discount received sone ‘Commission received AAA, Bank interest XXXX | Rent income | xxxx Dividend | xxxx Profit on sale of machinery | xxxx Profit on sale of investment | xxx | xanax Less: All expenses: Administration expenses: Salaries xxx Office rent, rates & taxes 200 Printing & stationer xxxx | Insurance XXXx Blectricity charges XAXX, Repairs & renewals XxXX, | Depreciatio | Office equipment | | xxxx Office furniture | xxxx Office building XXXX, Selling & distribution expenses: | Salaries (selling staff) xxxx | | Advertisement xaxx | | Carriage outward XXX | Bad debts XXXX. Selling commission XxX, | Financial expenses: | Bank charges XXX, Interest on loans XXX |(120) ILMI FUNDAMENTALS OF ACCOUNTING Chapter-7 Discount allowed AAXX Loss on sale of machinery | xxxx Loss on sale of investment Net profit / (Net loss) Transferred to capital | (axxxx) 3.2 Balance sheet: ‘A balance sheet is a list of assets and claims over a business at some specific point of time and is prepared from an adjusted trial balance. It shows the financial position of a business by detailing the sources of funds and the utilization of these funds. A balance sheet shows the assets and liabilities grouped, properly classified and arranged in a specific manner. Formats A balance sheet can be prepared in the following two forms 3.2.1. Horizontal form Under this format, the left hand side lists liabilities of the business as on the last day of the accounting period as well as detail of its capital position. Various assets of the enterprise are listed on the right hand side of the balance sheet. Specimen ABC Ltd. Balance sheet As on December 31, 2008 _ { Liabilities Amount Assets Amount Rs, Capital xxxx | Land & building Reserves xxxx | Plant and machinery Outstanding expenses xxxx | Furniture & fixtures Loans xxxx | Stock Trade creditors xxxx | Sundry debtors Bills payable xxxx__ | Bills receivable Other investments Government securities Cash at bank Cash in hand XANAX, Note-I: Assets of the same class are grouped together. All fixed assets together and all current assets together. Note-2: The balance of capital account is calculated as under: Capital bid sox ‘Add: Profit for the period XXX. xxx Less: Drawings for the period re Capital fd xXxChapter -7 A FINANCIAL STATEMENTS - ADVANCED 21) 3.2.2 Vertical form - The vertical form merely involves a re-arrangement of the information shown by a balarice sheet presented in horizontal form. The vertical format clearly displays the network of the business to the owner i.e. the capital. This format also displays the amount, of investment in the fixed assets and in working capital which is the difference between the current assets and current liabilities. ‘Specimen ABC Ltd. Balance sheet As at 31 December 2006 Particulars ‘Amount | Amount | Amount Rs. Rs. Rs. Non-current assets: Land & building oe Plant and machinery XXX Furniture & fixtures wax | x0 Current assets: Stock 200K Sundry debtors XXXK Billls receivable XXX Other investments XXX Government securities XXX Cash at bank 200% Cash in hand : wax | 0x Current liabilities: Reserves XxX Outstanding expenses XXAX Loans XXX Trade creditors XXXX Bills payable XXX (xxx) |_xxx Working capital [xxx | Net assets employed Financed by: Capital xX Add: Net profit max | xxx 4. Adjusting entries (Concept and purpose) Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing an entity's financial statements. To demonstrate the need for an accounting adjusting entry let's assume that an entity borrowed money from its bank on December 1, 2013 and that the entity's accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2014. This means that the entity's accounting records as of December 31 do not contain any payment to the bank for the interest the entity incurred from December 1 through December 31. (Of coursé the loan is costing the(122) ILMI FUNDAMENTALS OF ACCOUNTING entity interest expense every day, but the actual payment for the interest will not occur u the entity's December income statement to accurately report the company's profitability, it must include all of the entity's December expenses, not just the expenses that were paid. Similarly, for the entity's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date, An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit interest expense and credit interest payable for the amount of interest from December 1 to December 31 . ‘Another situation requiring an adjusting journal entry arises when an amount has already been recorded in ’s accounting records, but the amount is for more than the current accounting period. To illustrate le’s assume that on December 1, 2013 the entity paid its insurance agent Rs. 2,400 for insurance protection during the period of December 1, 2013 through May 31, 2014. The Rs. 2,400 transaction was recorded in the accounting records on December 1, but the amount represents six months of coverage and expense, By Dece nber 31, one month of the insurance coverage and cost have been used up or expired, Hence the income statement for December should report just one month of insurance cost of Rs. 400 (Rs. 2,400 divided by 6 months) in the account insurance expense. The balance sheet dated December 31 should report the cost of five months of the insurance coverage that has not yet been used up. (The cost not used up is referred to as the asset prepaid insurance. The cost that is used up is referred to as the expired cost insurnce expense.) This means that the balance sheet dated December 31 should report five months of insurance cost or Rs. 2,000 (Rs. 400 per month-t#miés 5 months) in the asset account prepaid insurance. Since it is unlikely that the Rs. 2,400 transaction on December 1 was recorded this way, an adjusting entry will be needed at December 31, 2013 to get the income statement and balance sheet 10 report this accurately. To understand the effect of each different adjustment independently, we will by one. uss each adjustment one 4.1 Adjustment # 1 (Closing stock) i, Using stock appearing in the additional information will be credited in trading account and is to be shown as a current asset in the balance sheet. ii, If closing stock is appearing in the trial balance it is to be shown in the balance sheet only. 4.2 Adjustment # 2 (Goods distributed as free samples) This is one kind of advertisement. When goods are distributed to prospective customers as free samples an expense in incurred. The following entry is passed: Dr: Advertisement Cr: Purchases (For trader) / Trading (For manufacturer) Example-1 Prepare a trading and profit & loss account for the year ended 31*' December 2003 and a balance sheet as oon that date from the following trial balance and adjustment items. DR.(Rs.) CR. (Rs.) Opening stock 23,000 Purchase & Sales 221,000 410,000, Sales return & Purchase return 4,000 6,000 Discount received 1,100Chapter -7 FINANCIAL STATEMENTS - ADVANCED (123) Wages: 21,750 Salaries 33,850, Carriage Inwards 19,550 Advertising expenses 5,100 Bills receivable & payable 4,500 5,500 12% Bank loan (taken on 1 Nov 03) 75,000, Office equipment 99,850 Land & building 168,000 Provision for doubtful debts 1,100 Sundry debtors & creditors 22,500 20,000 Rates & taxes . 2,650 Office electricity expenses 4,700 ‘Telephone charges 2,200 Cash at bank 9,000 Printing & st 5,600 Postage stamps 545. Furniture 100,000 Petty cash 105 Carriage outward 6,000 Insurance premium 1,500 Bad debts 400 Interest on bank loan paid 750 ‘Capital account 238.450 Prepaid printing 600 _ S110 757,150 Adjustment items: > ‘Closing stock was valued at Rs. 19,000. » Goods worth Rs. 1,250 were distributed by salesmen as free ‘samples, but no entry has made. Solution-1 X&Co. Trading and profit & loss account For the year ended December 31, 2003 Particulars __| Amount Particulars Amount | Rs. y Rs. | Opening stock 23,000 | Sales 410,000 | | Purchases 221,000 Less: Sale return (4.000) | 406,000 L Less: Purchase retum Wages Carriage in 19,550 Gross profit c/d 146,950 426,250 (6,000) | 215,000 | Adver isement expenses 21,750 | Closing stock 0(124) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter -7 Salaries 33,850 | Gross profit b/d | 146,950 Advertisement expenses 5,100 Discount received 1,100 | ‘Add: Goods distributed 1.250] 6,350 Rates & taxes: 2,650 | Office electricity expenses 4,700 | Telepione charges 2,200 inting & stationery 5,600 | Postage stamps 545 | Insurance premium. 1,300 | Carriage outwards 6,000 | Bad debts 400 Interest on bank loan 750 Add: Outstanding, 750] 1,500 | Nat profit, |__ 82,755 148,050 : X& Co. Balance Sheet As on December 31, 2003 - Liabilities ‘Amount Assets Amount | Rs Rs Capital 238,450 Land and building 168,000 Add: Net profit 82,755 | 321,205 | Office equipment 99,850 | Furniture | 100,000 12% Bank loan 75,000 | Stock | 19,000 Creditors 20,000 | Debtors 22,500 | Bills payable 5,500 | Less: Provision for B.D. (1,100) 21,400 Outstanding interest 750 | Bills receivable 4,500 Bank 9,000 Petty cash. 105 Prepaid printing 600 422,455 [432.455 43 Adjustment #3 (When asset account is maintained at written down value The following entries are passed: i Dr. Depreciation Cr Asset ii, Dr. Profit & loss account Cr.“ Depreciation 4.4 “Adjustment # 4 (When asset account is maintained at cost price) The following entries are passed: i Dr. Depreciation Cr. Provision for depreciation ji, Dr. Profit & loss account Cr. DepreciationChapter-7. FINANCIAL STATEMENTS - ADVANCED (125) Example-2 Prepare a trading and profit & loss account for the year ended 31* December 2003 and a balance sheet as ‘on that date from the information provided in example # 1. Also consider the following adjustment item: > —_ Depreciate furniture by 7.5% p.a and office equipment by 10% p.a. Solution-2 X&Co. ‘Trading and profit & loss account For the year ended December 31, 2003 i] Particulars __| Amount Particulars Amount | j RS Rs | | Opening stock 23,000 | Sales 410,000 | | Purchases 221,000 Less: Sale return (4,000) | 406,000 | Less:-Purchase return (6.000) | 215,000 | Advertisement expenses 1.250 | Wages 21,750 | Closing stock 19,000 Carriage in 19,550 Gross profit e/d 146,950 426,250 [426,250 | Salaries 33,850 | Gross profit b/d fd 146950 | Advertisement expenses 5,100 Discount received 1,100 Add: Goods distributed 1.250] 6,350 | Rates & taxes 2,650 | Office electricity expenses 4,700 | ‘Telephone charges 2,200 | Printing & stationery 5,600 | Postage stamps 545 | Insurance premium 1,500 | | Carriage outwards 6,000 | Bad debis 400 Interest on bank loan 750 | ‘Add: Outstanding 150] 1,500 Depreciation: | Furniture 7,500| 17,485 Office equipment 9.985 _65,270 | 148,050 | | Nat profit(026) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -7 X&Co. Balance Sheet As on December 31, 2003 Liabi Amount Assets ‘Amount | Rs. Rs. Capital 238,450 Land and building 168,000 | Add: Net profit 65.210 | 303,720 | Office equipment 99,850 | | Less: Depreciation 9,985)| 89,865, 12% Bank loan 75,000 | Furniture 100,000 Creditors 20,000 | Less: Depreciation (7,500)| 92,500 Bills payable 5,500 | Stock 19,000 Outstanding interest 750 | Debtors 22,500 Less: Provision for B.D. 1,100)} 21,400 Bills receivable 4,500 Bank 9,000 | Petty cash 105 | Prepaid printing 600 | | 404,970 404,970 4.5 Adjustment # 5 (Bad debts) Goods are after sold to known customers on credit some of these fail to pay their debts. These debts which cannot be recovered are called Bad Debts. It is a loss to business and adjustment is needed i Dr. Bad debts Cr. Provision for doubtful debts ii Dr. Profit & loss ac Cr. Bad debts seount 4.6 Adjustment # 6 (Provision for discount on debtors) Most businesses give cash discount to debtors who make early payment. For this purpose, an be: Dr. Discount allowed Cr. Provision for discount estimate is made on debtors who will pay their existing balances in future. Accounting entry will ‘This provision is shown in the Balance Sheet by way of deduction form Sundry Debtors, Example-3 Prepare a trading and profit & loss account for the year ended 31* December 2003 and a balance sheet as ‘on that date from the information provided in example # 2. Also consider the following adjustment items: > Provision for doubtful debts to be maintained at 5% on debtors. » ‘eate a provision for discount on debtors at 2%.Chapter -7 FINANCIAL STATEMENTS - ADVANCED 27) Solution-3 X&Co. Trading and profit & loss account For the year ended December 31, 2003 Particulars [ Amount Particulars ‘Amount RBs. Rs Opening stock 23,000 | Sales 410,000 Purchases 221,000 Less: Sale retum (4,000)| 406,000 Less: Purchase return (6.000)| 215,000 | Advertisement expenses | 1,250 Wages 21,750 | Closing stock 19,000 | Carriage in- 19,550 Gross profit e/d 146,950 426,250 Salaries 33,850 | Gross profit b/d 146.950 Advertisement expense 5,100 Discount received 1,100 ‘Add: Goods distributed 1250] 6,350 Rates & taxes | 2,650 Office electricity expenses 4,700 Telephone charges 2,200 Printing & stationery 5,600 Postage stamps 545 | Insurance premium. . 1,500 Carriage outwards 6,000 Bad debts (400 + 25) 425 Interest on bank loan 750 ‘Add: Outstanding 750| 1,500 Depreciation: Furniture 7,500 . Office equipment 9.985) 17,485 Discount allowed 428 Nat profit 64,817 148,050 X& Co. Balance sheet 8 ‘As on December 31, 2003 Liabilities ‘Amount ‘Assets ‘Amount Rs. Rs, Capital 238,450 Land and building 168,006 | Add: Net profit 64,817) 303,267 | Office equipment 99,850 | Less: Depreciation (9.985) | 89.865 12% Bank loan 75,000 | Furniture 100,000 | | Creditors 20,000 | Less: Depreciation (7,500) | 92,500 | Bills payable 5,500 | Stock 19,000 Outstanding interest 750 | Debtors 22,500 Less: Provision for B.D. (1,125) Less: Provision for discount (428) | 20,947 Bills receivable 4,500 Bank 9,000 Petty cash. 105 Prepaid printing 600 404317 | 04.517 |(128) 4.8 Adjustment # 8 (Abnormal loss of stock by a ILMI FUNDAMENTALS OF ACCOUNTING Chapter -7 4.7 Adjustment #7 Sometimes, a debtor may also be a creditor for the business. If finished goods sold to A for Rs. 1,000 and raw material purchased from him Rs. 500, the name of A will appear both in the creditors and the debtors list. Generally we set off these types of accounts, The entry will be: Dr. Sundry creditors Cr. Sundry debtors The adjusting entries are: i Dr. Accident loss Cr. Purchases ii Dr._Profit & loss account Cr. Accidental loss Example-4 Prepare a trading and profit & loss account for the year ended 31 December 2003 and a balance sheet as ‘on that date from the information provided in example # 3. Also consider the following adjustment items: > Commission of Rs. 650 was earned but not yet received. > Rates & taxes of Rs. 400 were paid in advance for 2004. > Creditors include a debt of Rs. 2,000 to Mr. KHALID who is also included in the list of debtors for Rs. 5,000. Solution-3 X& Co. ‘Trading and profit & loss account For the year ended December 31, 2003 Particulars Amount | Particulars | Amount Rs. | Rs. Opening stock 23,000 | Sales 410,000 | Purchases 221,000 Less: Sale return (4.000) | 406,000 Less: Purchase retum (6.000) 215,000 | Advertisement expenses 1,250 Wages 21,750 | Closing stock 19,000 Carriage in* 19,550 Gross profit c/d 146,950 426,250Chapter-7 FINANCIAL STATEMENTS - ADVANCED. 29) Salaries 33,850 | Gross profit b/d 146,950 Advertisement expenses 5,100 Discount received 1,100 Add: Goods distributed 1,250] 6,350 | Accrued commission 650 Rates & taxes 2,650 Less: Prepaid (490) 2,250 Office electricity expenses 4,700 Telephone charges 2,200 Printing & stationery 5,600 Postage stamps 545 Insurance premium 1,500 | Carriage outwards 6,000 | Bad debts 325 Interest on bank loan 150 ‘Add: Outstanding 750] 1,500 Depreciation: Furniture 7,500 Office equipment 9.985 | 17,485 Discount allowed 390 Nat profit 66,005, 148,700 X& Co. Balance sheet As on December 31, 2003 Liabilities ‘Amount Assets ‘Amount Rs. Rs] Capital 238,450 Land and building 168,000 | | Add: Net profit 66,005 | 304,455 | Office equipment 99,850 Less: Depreciation (9.985) | 89,865 12% Bank loan 75,000 | Furniture 100,000 Creditors 20,000 Less: Depreciation (2.500)| 92,500 Less: Set off (2,000) | 18,000 | Stock 19,000 Bills payable 5,500 | Debtors 22,500 ‘Outstanding interest 750 | Less: Set off (2,000) Less: Provision for B.D. (1,025) | Less: Provision for discount (390) | 19,085 | Bills receivable 4,500 | Bank 9.000 Petty cash 105 Prepaid rates 400 Accrued commission 650 Prepaid printing |___ 600 403,705 403.7 el eee 4.9 Adjustment # 9 (Drawings made by the owner) Drawings made by the owner may be in cash or in Kind. Drawings rate to the resources of business and the capital of the owner (s). i When drawings made in cash: Dr. Drawings Cr Cash / Bank(130) 4.10 411 412 413 414 ILMI FUNDAMENTALS OF ACCOUNTING Chapter-7 ii, When drawings made in kind: Dr. Drawings Cr. Purchases Adjustment # 10 (Goods sent on approval basis) When goods are sold initially to a customer on approval basis, we pass the entry for sales. At the year end, if the goods are still lying with the customers awaiting approval, the following entries are to be passed: i Dr. Sales Cr. Sundry debtors ii. Dr. Stock with customers Cr Trading In the Balance Sheet, it will be deducted from sundry debtors at sales price and the closing stock will be increased by the cost of such sales. Adjustment # 11 (Interest on loan) Interest on loan in the Trial Balance, the amount of the loan appears in the credit column, The amount of interest paid appears in the debit column. If a portion is still outlasting at the year end, following entry is passed: Dr. Interest on loan Cr. Interest payable Adjustment # 12 (Interest on capital) Sometimes, it may be required to make a provision for interest on the capital contributed by the proprietor or the partners. Such interest is not a charge against profit but an appropriation of profit. In this connection, the following two entries have to be passed: i Dr. Profit & loss appropriation account Cr. Interest on capital ii, Dr. _ Interest on capital Cr. Capital / Current account Adjustment # 13 (Interest on drawings) Sometimes, interest on drawings may be charged to restrict the frequent drawings by the partners such interest increases the divisible profit. The following two entries have to be passed: i Dr. Interest on drawings Cr. Profit & loss appropriation account ii Dr. Capital / current account Cr. Interest on drawings Adjustment # 14 (Difference in trial balance)Chapter -7 FINANCIAL STATEMENTS - ADVANCED 31) Sometimes, difference in trial balance will occur due to unknown errors. We will eliminate the difference by opening a suspense account. If suspense account is on debit side then either we will take it as an asset or an expense. But it’s better to consider it as an asset. If suspense account is on. credit side then either we will take it as a liability or an income, But it’s better to consider it as a liability. Remember that the suspense account in the trial balance will have a single effect. 4.15 Adjustment # 15 (Closing stock in the trial balance) If closing stock is taking place in the trial talance then we will take its single effect. We will show it in the assets side of balance sheet under the head of current assets. Actually the closing stock will take place in the trial balance in case of “Adjusted Purchases”. So if closing stock is taking place in thé trial balance then we will consider purchases as adjusted purchases 5. Adjusted trial balance ‘An adjusted trial balance is a list of the balances of ledger accounts which is created after the preparation of adjusting entries. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities. We can prepare income statement and the balance sheet directly from the adjusted trial balance as well as from the information of pre-adjustment trial balance and adjustment details(132) ILMI FUNDAMENTALS OF ACCOUNTING Chapter-7 PRACTICE QUESTIONS Question # 1: The following is the trial balance of Mr. ZAID on 31 December 2002. DR.(Rs.) CR. (Rs.) Capital 8,000 Sundry Creditors 10,400 Plant & Machinery 10,000 Furniture & fittings 520 Stock (01-01-02) 9,600 Motor van 2,400 Debtors 9,140 Cash in hand 80 Cash at bank 1,300 Wages 30,000 Salaries 2,800 Purchases 42,700 Sales 96,000 Bills payable 1,120 Bills receivable 1,440 Retumn inwards 1,860 Provision for doubtful debts 500 Drawings 1,400 Return outwards 1,100 Rent 1,200 Factory lighting & heating 160 Insurance 1,260 General expenses 200 Bad debts 500 Discount 1,300 740 Question #2: The following adjustments are to be made: ® (ii (iy wy) o) wi) Prepare trading and profit & loss account and the balance sheet Stock on 31* December 2002 was Rs. 10,400. 3 months factory lighting & heating is due, but not paid Rs. 60. 5% depreciation to be written off on furniture. Write off further bad debts Rs. 140. During the year machinery was purchased for Rs. 4,000 bu Account, it was debited to Purchases The provision for doubtful debts to be increased to Rs.600 and provision for discount on. debtors @ 2% to be made. From the following trial balance of HARIS & Co. and additional information prepare final accounts for the year ended 31% March 1998.Chapter-7 FINANCIAL STATEMENTS - ADVANCED, +433) DR.(Rs.) CR. (Rs) Capital 200,000 Furniture 40,000 Purchases 300,000 Debtors 400,000 Interest earned 8,000 Salaries 60,000 Sales 642,000, Purchase return 10,000 Wages 40,000 Rent 30,000 Saies return 20,000 Bau debts written off 14,000 Creditors 240,000 Drawings 48,000 Provision for bad debts 12,000 Printing & stationery 16,000 Insurance 24,000 Opening stock 100,000 Office expenses 24,000 Provision for depreciation - furniture 1,116,000 ‘Additional Information: 1 Depreciate furniture by 10% on original cost. 2. A provision for doubtful debts is to be created to the extent of 5% on sundry debtors. 3. Salaries for the month of March 1998 amounting to Rs. 6,000 were unpaid which must be provided for. However, salaries include Rs. 4,000 paid in advance. 4, Insurance amounting to Rs. 4,000 paid in advance, 5. Provide for outstanding office expenses Rs. 16,000, 6. Stock used for private purposes Rs. 12,000. 7. Closing stock-in-trade Rs. 120,000. Question #3: From the following balances taken from the ledger of Mr. OMER, prepare the trading and profit & loss account for the year ended 31 March 2006 and the balance sheet as at March 31, 2006 in vertical format: Rs. Creditors 38,000 Building 30,000 Income tax. 2,050 Loose tools 2,000 Cash at Bank 32,400 Sundry expenses 3,980 Bank interest (CR) 150 Purchases. 314,000 Wages 20,000 Bad debs Loan Debtors Investments. Provision for bad debts, Rent & rates Furniture Stock Capital 5,000 19,000 13,000 3,200 1,700 6,000 $4,700 94.780(134) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter -7 Carriage inwards 2,240 Discount allowed 1,260 Sales 370,000 Dividend received 1,070 ‘Motor van 25,000 Drawings 4,000 Cash in hand 670 Bills payable 20,000 Adjustment to take into account: (a) Write-off further Rs. 600 as bad out of sundry debtors and create a provision for bad debts at 20% on debtors. (b) Dividends accrued and due on investments is Rs. 270. Rates paid in advance Rs. 200 and wages owing Rs. 900. (©) On 31-03-2002 stock was valued at Rs. 30,000 and loose tools were valued at Rs. 1,600. (@) Write off 5% for depreciation on buildings and 40% on motor van. (e) Provide for interest at 10% p.a due on loan taken on 01-06-01 ()_ Income-tax paid has to be treated as drawings Question #4: On March 31, 1997, the following trial balance was extracted from the books of Mr. ASIF: DR.(Rs) CR. (Rs.) Capital A/e 100,000 Plant & machinery 160,000 Sales 354,000 Purchases 120,000 Returns 2,000 1,500 Opening stock 60,000 Discount 700 1.600 Bank charges 150 Sundry debtors 90,000 Sundry creditors 50,000 Salaries 13,600 Manufacturing wages 20,000 Carriage in 1,500 Carriage out 2,400 Bad debis provision 1,050 Rent, rates & taxes 20,000 Advertisement 4,000 Cash in hand 1,800 Cast at bank 12,000 508,150 508,150 Prepare final accounts for the year ended March 31, 1997 and the balance sheet as on that date. Following are required: - (a) Closing stock Rs. 70,000. (6) Depreciation on plant at 6%. (©) Bad debts provision to be adjusted to Rs. 1,000.Chapter -7 @ FINANCIAL STATEMENTS - ADVANCED. Interest on capital to be allowed at 5% pa. (035) Question #5: From the following trial balance of a trader you are required to prepare a trading and profit & loss account for the year ending 31 December, 2005 and a balance sheet as on that date: (ii) . (iii) ) “ w DR. (Rs.) Cash in hand 2,000 Stock 7,000 Creditors Debtors 38,400 Drawings 10,260 Sales Purchases 160,400 Wages 14,400 General expenses 10,240 Furniture 8,000 Goodwill 6,000 Capital 258,800 CR. (Rs.) 7,800 185,600 Furniture (book value on January 1, Rs. 800) was sold on 30" June for Rs. 900 and was passed through the sales book Depreciate furniture at 10% p.a. Private purchases amounting to Rs. 200 were passed through the purchase day book, Sales book was overcast by Rs. 1,000. Wages outstanding Rs. 50, though included in the wages account, was not included trial balance. Stock at the end was valued at Rs. 9,000. In view of the constant fall in prices, it has been decided to write off socks by 10%.(36) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -7 ASSIGNMENT MATERIAL A.M# 1: Prepare Income Statement for the year ended 31st December, 2008 and Balance Sheet as at that date from the following Trial Balance of K. Rama Rao. Dr. Balance Rs, Cr. Balance Rs, Drawings 45,000 Capital 160,000 Goodwill 90,000 Bills Payable 33,800 Land & Building 60,000 Creditors 70,000 Plant & Machinery 40,000 Purchases Returns 2,650 Loose Tools 3,000 Sales 218,000 Bills Receivable 3,000 Stock, Ist Jan., 2008 40,000 Purchases, 51,000 Wages 20,000 Carriage Outwards 500 Carriage Inwards 1,000 Coal 5,800 Sal 35,000 . Rent, Rates & Taxes 2,800 Discount 1,500 ‘Cash at bank 25,000 Cash in hand 400 Sundry Debtors 45,000 Repairs 1,800 Printing & Stationery 500 Bad Debts 1,200 ‘Advertisements 3,500 Sales Returns 2,000 Furniture 1,200 General Expenses 5,250 Adjustments: 1) Closing Stock on 31st December, 2008 was Rs.35,000. 2) Depreciation Plant & Machinery, Tools and Furniture by 10% and Land & Buildings by 2%. 3) Provide Rs. 1,500 for wages Accrued salaries), 4) Advertisements prepaid are Rs. S00. 5) Provide 5% on debts against bad debts and 2% against discount allowable. A.M #2: On 31st March, 2008, the following Trial Balance was extracted from the Books of Chatterii Capital A/c Machinery (at cost) Provision for depreciation (Machi Sales DR (Rs.) 100,000 CR (Rs.) 50,000 20,000 177,000,Chapter -7 AM#3: FINANCIAL STATEMENTS - ADVANCED. Purchases Returns Opening Stock Discount Bank Charges Sundry Debtors Sundry Creditors Salaries ‘Manufacturing Wages Carriage In Carriage Out Bad Debts Provision Rent, Rates and Taxes Advertisements Cash in hand Cash in Bank 60,000 1,000 350 5 45,000 6,800 10,000 750 1,200 10,000 2,000 900 6,000 075 750 30,000 800 25,000 525 274,075 37) You are asked to prepare the final accounts for the year ended 31st March, 2008 and the Balance Sheet as on that date after making adjustments for the following (also pass adjusting entries). ) 2) 3) ‘The following is the Trial Balance of B. Govil on 30th June, 2009: Closing Stock Rs. 35,000, Depreciation of Plant at 66. Using straight line method, Bad Debts Provision to be adjusted to Rs.500. Cash in hand Cash at bank Purchases Account Sales Account Returns Inwards Account Retums Outwards Account Wages Account Fuel and Power Account Carriage on Sales Account Carriage on Purchases Account Stock Account (Ist July, 2008) Building Account Freehold Land Account Machinery Account Patents Account Salaries Account General Expenses Account Insurance Account Drawings Account Capital Account Sundry Debtors Sundry Creditors DR (Rs.) 540 2,630 40,675 680 10,480 4,730 3.200 2,040 5,760 30,000 10,000 20,000 7,500 15,000 3,000 600 5,245 14,500 176,580) CR (Rs.) 98,780 500(138) AMES: ILMI FUNDAMENTALS OF ACCOUNTING Chapter -7 Taking into account the following adjustments, make the necessary journal entries Trading and Profit and Loss Account and the Balance Sheet on 30" June 2009: . and prepare a) Stock in hand on 30th June, 2009 is Rs. 6,800. b) Machinery is to be depreciated at the rate of 10% and patents are to be amortized at the rate of 20% on straight line method. c) Salaries for the month of June, 2009 amounting to Rs. 1,500 were unpaid. 4) Insurance includes a premium of Rs. 170 on a policy, expiring on 31st December, 2009. €) Wages include a sum of Rs. 2,000 spent on the erection of a cycle shed for employees and customers, 1) A provision for Bad and Doubtful Debts is to be created to the extent of 5% on sundry debtors. ) Building is to be depreciated at 2.5% on diminishing balance method. From the following Trial balance of A. Atmaram as at 31st December, 2008, you are required to prepare a Income Statement for the year ended 31st December, 2008 and a Balance Sheet as at that date, after making necessary adjustments, Also give journal entries for the adjustments. DR(Rs) CR (Rs.) ‘A. Atmaram’s Capital Account 80,000 ‘A. Atmaram’s Drawings Accounts 6,000 Plant & Machinery (Balance Ist January, 2008) 20,000 Plant & Machinery (Additions on Ist July, 2008) 5,000 Stock on Ist January, 2008 15,000 Purchases 82,000 Returns Inwards 2,000 Sundry Debtors 20,600 Furniture and Fixtures 15,000 Provision for depreciation (Furniture and fixture) 10,000 Freight and Duty 2,000 Carriage Outwards 500 Rent, Rates and Taxes 4,600 Printing and Stationery 800 Trade expenses 400 Sundry Creditors 10,000 Sales 120,000 Returns Outwards 1,000 Postage and Telegrams 800 Provision for Doubtful Debts 400 Discounts, 800 Rent of premises sub-let for year up to 30th June 2008 1,200 Insurance charges 700. Salaries and wages 21,300 Cash in hand 6,200 Cash at Bank 20,500 223,400 223,401Chapter-7 FINANCIAL STATEMENTS - ADVANCED (39) Adjustments: 0 2) 3) 4) 5) 6) “n Stock on 31st December, 2008 valued at Rs.14,600, Write off Rs.600 as Bad Debts. ‘The Provision for Doubtful Debts is to be maintained at 5% on Sundry Debtors. Create a provision for Discounts on Debtors and Reserve for Discounts on Creditors at 2%. Provide for depreciation on Furniture und Fixture at 5% per annum, and on Plant and Machinery at 20% per annum. Insurance prepaid was Rs.100. A fire occurred on 25th December, 2008 in the godown and stock of the value of Rs. 5,000 was destroyed. It was fully insured and the Insurance Company admitted the claim in full(140) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -7 QUIZ Question: Phe following figures have been extracted from the record of Fancy Provision Stores, a proprietorship concern, as al 31st December, 2008: Rupees Furniture & Fixture 15,000 Proprietor’s Capital Account 54,000 Cash in Hand 3,000 Stock on 31.12.2008 50,000 Fixed Deposits 134,600 Drawings 5,000 Provision for Bad Debts 3,000 Cash in Bank 10,000 Cost of goods sold 300,000 Salaties 19,000 Carriags Inward 41,000 Insurance 6,000 Sundry Debtors 60,000 Sales 600,000 Advertisements 10,000 Postage & Telephone 3.400 Bad Debts 2,000 Printing & Stationery 9,000 General Charges 13,000 Sundry Creditors 40,000 Deposit from Customers 6,000 ‘Advances to suppliers 2,000 Following further information was available: 1) Cash sale of Rs. 25,000 had been credited to the Purchase Account. 2) Salary of Rs. 2,000 of an employee had been entered in the Cash Book as Rs. 1,000. 3) Depreciation on Furniture to be charged @ 10%. 4) Old Furniture was sold during the year for Rs. 10,000 and the proceeds credited to the Furniture Account. ‘The written down value of this furniture was Rs. 5,000. 5) A sum of Rs, 10,000 received from a party having purchased some material belon; business of the proprietor was credited to the Sundry Debtors Account. ig to separate 6) ‘The proceeds of a matured fixed deposit amounting to Rs. 25,400 had been credited to the Fixed Deposit Account. The cost of the Fixed Deposit was Rs. 20,000. 7) Liability for outstanding rent amounting to Rs. 2,000, 8) An advance of Rs. 1,000 paid to an employee against the salary of January, 2009 had been debited to Salary Account.Chapter -7 FINANCIAL STATEMENTS - ADVANCED (at) 9) The office premises were sublet from Ist December, 2008 for a monthly rent of Rs. 1,000 but the rent for December has not yet been received. ‘You are required to prepare: i) Trading & Profit & Loss Account for the year ended 31st December, 2008. ii) Balance Sheet as at 31st December, 2008. All the workings should be shown alongwith the adjusting entries.Chapter - 8 NOTES TO THE FINANCIAL STATEMENTS (143) PEON NE 1 Notes to the financial statements Notes contain information in addition to that presented in the statement of fineneial position, statement(s) of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows. Notes provide narrative descriptions or disaggregations of items presented in those statements and information about items that do not qualify for recognition in those statements. Structure The notes shall: (a) present information about the basis of preparation of the financial stat accounting policies used in accordance with IFRSs. ments and the specific (b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them. ‘An entity shall, as far as practicable, present notes in a systematic manner. An entity shall cross-reference cach item in the statements of financial position and in the statement(s) of profit or loss and other comprehensive income, and in the statements of changes in equity and of cash flows to any related information in the notes 2 Disclosures A disclosure is additional information attached to an entity's financial statements, usually as explanation for activities which have significantly influenced the entity's financial results. Disclosure principle states that you should include in an entity's financial statements all information that would affect a reader's understanding of those statements. The interpretation of this principle is highly judgmental, since the amount of information that can be provided is potentially massive. To reduce the amount of disclosure, it is customary to only disclose information about events that are likely to have ‘a material impact on the entity's financial position or financial results, This disclosure may include items that cannot yet be precisely quantified, such as the presence of a dispute with a government entity over a tax position, or the outcome of an existing lawsuit, Full disclosure also means that you should always report existing accounting policies, as well as any changes to those policies (such as changing an asset valuation method) from the policies stated in the financials for a prior period. Several examples of full disclosure are: ¥ The nature and justification of a change in accounting principle > The nature of a non-monetary transaction > The nature of @ relationship with a related party with which the business has significant transaction volume(44) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -8 » ‘The amount of encumbered assets , ‘The amount of material losses caused by the lower of cost or market rule > ‘A description of any asset retirement obligations » The facts and circumstances causing goodwill impairment You can include this information in a variety of places in the financial statements, such as within the line item descriptions in the income statement or balance sheet, or in the accompanying disclosures. ‘The full disclosure concept is not usally followed for internally-generated financial statements. where management may only want to read the "bare bones" financial statements. 3. Ratios ‘Now-a-days we are living in the era of informations. Information plays a vital role to take a decision or not. In context of financial statement, one of devices that is commonly use in bringing out suitable information from financial statement data is ratio analysis. So, ratio Analysis is the starting point in developing the information desires by the analyst. Here Analyst means: © Investors . Lenders 5 Management itself + Competitors is the sole purpose behind such an analysis made by analyst? Ratios have to be evaluated in the context of some yard sticks. Generally, the ratios are computed for any ‘one or all of the following purposes: . Current years Vs Prior years 5 Actual Vs Budgeted + Entity Vs Competitors © Emity Vs Industry averages 4 Some popular ratios Some popular ratios are: . Gross profit ratio i * Net profit ratiosChapter -8 NOTES TO THE FINANCIAL STATEMENTS (145) © Return on equity (ROB) © Networking capital © Current ratio 4.1 Gross profit ratio Caleulation formula is: Gree one tC oG Netsales Example-I Net sales 200,000 Cost of goods sold 120,000 Gross profit ratio 5 Solution-1 Cree rer rt a eee On Netsales 200,000- . = 200,000-120,000 5) 200,000 = 80,000 49 200,000 40% Interpretation The ratio measure profit remaining after deducting cost of goods sol, Comment ‘The Higher the ratio, the better itis. 42 Net profit after tax) ratio Caleulation formula is: Net profit ratio pet pe tates Netsales Example-2 Net sales 200,000(146) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 8 Gross profit 120,000 Other operating expenses 40,000 Financial cost 10,000 Tax expenses 20,000 Net profit ratio ? Solution-2 Net profit, = G.P— (Other operating exp. + Financial cost + Tax exp.) 43 = 120,000 ~ (40,000 + 10,000 + 20,000) = 120,000 - 70,000 = 50,000 Net profitaftertax Net profit ratio = Netsales 100 50,000 49 200,000 = 25% Interpretation This ratio measures profit remaining after deducting all expenses including tax. Comment Higher the ratio, the better it is Return on equity (ROE) Calculation formula is: non = Profit aftertax —Preferencedividend |, ‘Averageequity Example-3 Net profit after tax 99,000 Dividend on preference shares 11,000 ‘Average share holder equity 176,000 Return on equity >Chapter - 8 NOTES TO THE FINANCIAL STATEMENTS (147) Solution-3 more - Profit after tax—Preferencedividend 4, Averageequity = 99,000 11,000 4 176,000 50% Interpretation This ratio measures the return on owner’s total investment into the business. Comment The higher the ratio, the better its. Note: Equity means Owners’ Equity / Shareholders Equity / Stockholders Equity / Net Worth / Net Wealth / Net Assets / Shareholders’ Funds / Members” Gross Contribution / Members’ Investments / Members” Interest. 44 Net working capital Calculation formula is: Networking capital = Current assets ~ Current liabilities =-— Rs. Example-4 Current assets 40,000 Current liabilities 30,000 Solution-4 Net working capital = 40,000 30,000 = 10,000 Interpretation This shows the surplus / (deficit) funds available in next year, +ve shows we will have surplus funds und —ve shows deficit of funds which is an alarming situation for company. 4.5 Current ratio / Working capital ratio Calculation formula is: Current ratio = times or 2:1(148) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter-8 Example-5 Current assets 80,000 Current liabilities 50,000 Current ratio 2 Solution-S Currentassets Current ratio = pa CUTE ASSES Current liabilities 80,000 Interpretation This ratio shows that how many times current assets are available to meet current liabilities in the next year i.e, the no. of Rs. of current assets available to pay Rs. 1 of current liabilities. Comment Ratio of 2:1 is generally acceptable. However, the rule of 2:1 should not be blindly followed, while making interpretation of the ratio, because firms having less than 2:1 ratio may be having a better liquidity then even firms having more than 2:1 ratio. This is so because the current ratio measures only the quantity of current assets and not the quality of current assets.Chapter -8 Question # 1: Question # 2: Question # 3: Question # 4: Question # 5: NOTES TO THE FINANCIAL STATEMENTS PRACTICE QUESTIONS Calculate gross profit ratio from the following information: Net sales Cost of goods sold Calculate net profit ratio from the following information: Net sales Gross profit Other operating expenses Financial cost ‘Tax expenses Calculate return on equity from the following information: Net profit after tax Dividend on preference shares Average share holder equity Calculate net working capital from the following information: Current assets Current liabilities Calculate current ratio from the following information: Current assets Current liabilities 250,000 130,000, 300,000 150,000 60,000 15,000 25,000 110,000 20,000 190,000, 70.000 40,000 180,000 150,000 (149)(450) ILMI FUNDAMENTALS OF ACCOUNT! Chapter -8 ASSIGNMENT MATERIAL AM#I: Rs. Sales 500,000, Purchases 322,250 Opening stock Closing stock Selling & distribution expenses Administrative expenses Other income Interest expenses Paid-up capital of 20,000 shares Long term borrowing Retained earnings Current liabilities 50,000 Fixed assets 290,000 Current assets 150,000 Required: Calculate (i) Gross profit ratio (ii) Net profit ratio (iii) Return on equityChapter - 8. NOTES TO THE FINANCIAL STATEMENTS, Quiz Question: p Calculate the following and also comment gn them from the following balance sheet: (i) Net working capital (ii) Liquid ratio (ii) Current ratio Rs. 2000 shares @ Rs. 100 200,000 Reserves 90,000 Retained earnings 60,000 Current liabilities 130,000 480,000 Land & building Plant & machinery Inventory Sundry debtors Bank (ist) Rs. 150,000 80,000 149,000, 71,000 30,000 480,000hapter -9 RECTIFICATION OF ERRORS (153) OF ERROR: Introduction Errors are unintentional misstatements or omissions of amounts and disclosures in financial statements. These include mistakes in gathering or processing data from which financial statements are prepared Errors can also result in incorrect accounting estimates arising from oversight or’ misinterpretation of facts and mistakes in the application of accounting principles relating to account classification, manner of presentation of disclosure. Accounting errors Accounting errors result from mistakes or omissions in the financial accounting process. These include: i Mathematical mistakes ji, Mistakes in the application of accounting principles iii, Oversight iv. Misuse of facts ‘Types of errors Errors that occur in the books of account can broadly be ided into two classes which are as under 3.1 Errors of omission These errors result from the complete failure to enter a transaction in the books. Errors can further be classified into: 3.1.1 Complete errors When any particular transaction has not been entered at all in the journal or a book of original entry, it eannot be posted into the ledger. It means a complete error of omission has been occurred 3.1.2 Partial errors Ifa transaction has been journalized or recorded in a subsidiary book but has not been posted in both the ledger accounts, it will be an error of partial omission. Errors of commission These errors are the result of some positive act of commission on the part of the person responsible for the maintenance of the books of account. These can further be classified into: 3.2.1 Errors of principle These errors arise because of an incorrect application of the principles of accounting and failure to differentiate between capital and revenue expenditure,(54) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -9 3.2.2 Compensating errors These are group of errors, the total effect of which.is not reflected in the trial balance. These errors are of a neutralizing nature. One error is compensated by the other of an opposite nature. 3.2.3. Errors of posting Ifa transaction has been journalized or recorded in a subsidiary book but has been posted ‘wrongly in the ledger account, it is an error of posting 3.24 Errors of casting Casting is an accounting term for addition. These errors may occur due to short casting ‘or excess casting in any subsidiary book or in any account in the ledger. 4. Errors & trial balance We can divide this head into three different categories: 44 Errors disclosed by the trial balance The disagreement of a trial balance indicates the presence of one or more of the following errors in the books of account: i Omission to post an amount in the ledger. ii, Debit or credit entries are not posted at all or posted twice. iii, Debits are wrongly posted as credits and vice versa, iv. Wrong totalling of subsidiary books. v. fference in amounts of the eritries. vi. Errors in the computation of an account balance. vii. Omission of account balance. viii, Balance of an account wrongly recorded in the trial balance. ix. Errors in extraction of the trial balance. Errors not disclosed by the tt balance Following errors are not disclosed by the trial balance: i Errors of omission. ii, Errors of principle. iii. Compensating errors. iv. Recording wrong amount in the books of original entry.43 RECTIFICATION OF ERRORS (55) Errors in recording a transaction on the correct side of a wrong account Locating errors The following steps should be taken to locate the error or combination of errors that cause a trial balance to disagree: . Step! Check whether the debit and credit columns of trial balance have been added correctly by adding, these columns in opposite directions i.e. from bottom to top or from top to bottom, Step Iferror remains undetected, divide the exact difference between the totals of the two columns by 9, if itis totally divisible, this will mean that there is either “a” or “b”. i Transposition error is committed when a digit of an amount is placed wrongly: or ii, Slight error is committed when the decimal point is placed incorrectly Step Ill Divide the difference by 2, and scan the columns for an identical amount. If'a debit balance has been entered in a credit column, or vice versa, it will cause a difference which is twice of the amount. Step 1V . Check from the ledger if any account shows a balance equal to the difference in the trial balance. Step V Re-check opening balances of all accounts from the previous balance sheet. Step VI Cross check the amount in the trial balance with the balances in the ledger, Make sure that all the balances have been placed in the correct column of the trial balance. Step Vil Re-compute the balances of each ledger account. Step VIL the error remains undetected, check the postings from the journal and other books of « entry to the ledger accounts, Step IX I the error still remains undetected, repeat the above steps with the help of other members.(156) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -9 5. Rectifieation of errors We can also divide this head into two different categories which are as under: 5.1 Before preparation of trial balance According to the nature of errors, different steps are taken for their rectification, Sad One side errors For rectification, no journal entry is required to be passed. Only the relevant account in the ledger is to be debited (for short debit or excess credit) or to be credited (for short credit or excess debit), according to situation. Example-1 Purchase day book was casted Rs. 1,500 in place of Rs. 2,000. It means purchases ‘ount has been debited by Rs. 500 short. Solution-i Do rectify, the purchases account should be debited further by Rs. 500. ‘Two sided errors For rectification of these types of errors, following steps should be taken: i Write down the correct entry necessary for recording the transaction. ii. Write down the entry that has actually been passed. i. Pass in the journal, the required entry to arrive at the correct entry of step (i) and to cancel the entry of step (ii). Example-2 Rs, 500 received from FARHAN entered as Rs. 300 in the cash book Solution-2 Correct entry Dr Cash 500 Cr FARHAN 500 Entry has passed: Dr. Cash 300 Cr* FARHAN 300 Reetifying entry: Dr. Cash 200 Cr. FARHAN 200thapte RECTIFICATION OF ERRORS: 157) 52 After preparation of trial balance but before the preparation of final accounts We can also divide it into two different categories which are: 5.2.1 ide errors will be rectified by passing a journal entry via suspense account. 5.2.2 ‘Two sided errors ‘These errors are rectified by following the same procedures as is required to rectify two- sided error before preparation of trial balance. 6. Suspense account ‘A suspense account is a ledger account in which entries are made on temporary basis when the correct account cannot be identified immediately. It is opened in the following cases: 61 62 63 balance To balance a disagreed Sometimes, a trial balance does not tally despite all efforts. In such a case, the amount of difference is entered in the lighter column against suspense account. The point to note is that no double entry will be possible. Later, when the mistakes are detected, the rectifying entries are passed through suspense account. When all rectifications are made, suspense account automatically becomes nil To post doubtful items Sometimes, an item cannot be posted to correct account for any reason. For instance, you may receive a remittance of Rs, 1,500 but you may not know who has sent it. Then following entry will be passed Dr. Cash 1,500 Cr. Suspense 1,500 To record incomplete transactions Sometimes a suspense account is opened to record a balance that has not been finalized because @ particular deal has not been concluded. Example-3 For example, an advance of Rs. 10,000 received from A for the goods to be delivered in the future, subject to availability. A suspense account can include many transactions of this nature. without involving any error, Solution-3 i. Suspense account having debit balance may be treated as an expense or as an asset. ii, Suspense account having credit balance may be treated as an income account ot a liability(158) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -9 Preferably, suspense account is shown in balance sheet as an asset or as liability. 7. Effeets of errors on profit i ‘Some of the errors will have meant that original profit calculated will be wrong. Other errors will have no effect upon profits. ii Ifan error affects items only in the balance she altering, . then the original calculated profit will not need Example-4 Rs, 60 was paid to a creditor B. SAAD. It was correctly entered in the cash book. It was not entered anywhere else. Pass journal entry to correct the error. Solution-4 Dr. BSAAD 60, Cr Suspense 60 Both of these accounts appeared in the balance sheet only with B. SAAD as a part of creditors. The net profit does not have to be changed. iii, IF the error is one of the figures shown in the trading and profit and loss account. then the. original profit will need altering, Example-5 Rent account was added up incorrectly. It should be shown as Rs, 260 instead of Rs. 200. Solution-5- Dr. Rent 60 Cr. Suspense 60 Rent should have been increased by Rs. 60. This would have reduced net profit by Rs. 60.Question # 2: 3 8 Repair vo plant armour stoning at vag po he i's wren fr making ce additions to maine) to Rs. 680 were debited to wages account. ‘A cheque for Rs. 1,500 received from I. Khan was credited to the account af U- KAYANI. Goods to the value of Rs, 1,400°returned by Mr. ATIF were included in closing stock, but no entry was made in the books. Goods costing Rs. 4,000 were purchased for various members of the staff and the cost \was included in purchases. A similar amount was deducted form the salaries of the staf? members concerned and the net payment to them debited to salaries account. ‘A bill of exchange (received from HARIS) for Rs. 6,000 has been returned by the bank, with whom it had been discounted, as dishonoured and had been credited to bank ‘account and debited to bills receivable account, Goods sold to ZAID for Rs. 950 have been wrongly entered in the sales book as Rs. 590. The book keeper of a firm having been unable to agree the trial balance raised @ suspense ‘account, in which the entered the amount by which he was out of balance. The following errors were disclosed. (a) (b) (c) (d) (e) ) The addition of the analysis column in the tabular purchases journal posted to purchases account was found to be Rs. 300 short, through the addition of the total column was correct. Goods bought from a supplier amounting to Rs. 154 have been posted to the credit of his account at Rs. 1,540. A dishonoured bill of exchange receivable for Rs. 3,200 returned by the firm’s bank ha: been credited to the bank account and debited to bills receivable account. A cheque we received later from the customer for Rs. 3,200 and duly paid. An item of Rs. 320 entered in the sales return book has been posted’to the debit of customers for the goods. ‘Sundry items of plant sold amounting to Rs. 6000 had been entered in the sales day b the total of which book had been posted to the credit of sales account ‘An account of Rs. 1,600 owing by a customer, had been omitted from the list of s debtors.(160) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -9 (g) Discount amounting to Rs. 60 allowed to a customer, had been duly entered in his, account, but not posted to the discount account. (h) An amount of Rs. 200, being rates treated as paid in advance in the previous year, had - not been brought forward as a balance on the rates account, - You are required to: {a) Pass necessary journal entries. (b) Show the suspense account Question #3: ‘There was a difference in trial balance of Mr. S. BAKAR, a trader, on 31-12-1998, and the difference in the books was carried to a suspense account and the books were closed ‘Subsequently, on going through the books, the following errors were located: (a) (b) ©) () Rs, 4,529 paid for repairs to motor car, was debited to motor car account as Rs. 1,329. A sales of Rs. 2,800 to J.DANIYAL entered in the sales book as Rs. 4,240. A cash discount of Rs, 1,800 received was entered in the cash book but was not posted in the ledger. Rs, 800 being purchase return posted to debit of purchased account. ‘The purchase of a machine on 01-04-92 for Rs. 48,000 was entered in purchases book While carrying forward total of one page in IHSAN’s account, the amount of Rs. 2,000 Was written on the credit side instead of the debit A cheque of Rs. 12,384 received form OMER (after allowing a discount of Rs. 184) was endorsed to ZEESHAN in full settlement of Rs. 14,000. The cheque was finally dishonoured but no entry passed in the books. Give journal entries to rectify the above errors and prepare suspense account.Chapter-9 RECTIFICATION OF ERRORS: (161) AM# I: AM #2: AM#3: AS SIGNMENT MATERIAL How would you rectify the following errors. Give due narration for the adjusting entries a) Sales of old furniture has been recorded in Sales Journal. b) Goods in the amount of Rs. 1,000 returned by A (a customer) were not accounted for in book, but included in closing stock. ©) Goods taken by Proprietor for personal use worth Rs, 300 remained unaccounted for. A ader's book-keeper has agreed a Trial Balance and drafted the Income Statement and the Balance Sheet. You discovered the following errors:- a les on approval amounting to Rs. 1,000 have been included in the Sales Account; Rs. 750 of these goods were returned. No record of the return was made in the books, but the returned goods were included in Stock at their cost price of Rs. 500. (2) A cheque for Rs. 2,500 received for a loss of stock sustained by fire has been paid by the proprietor into his private bank account and not recorded in the business books, (3) Purchased goods amounting to Rs. 2,000 are included in Stock, but the invoice was dated forward and is not entered for the period under review. (4) There were three compensating errors, viz, Discounts received were under cast Rs. 50, Debit side of a Sales Ledger Account was over cast Rs. 100, and a payment of Rs. 150 for Legal Expenses had not been posted from the Cash Book. State the effect of each of these errors, and summarize the alterations to be made in the Accounts as originally drafted Upon drawing up a Trial balance, a book keeper finds that the credit total exceeds the debit total by Rs. 12.986. This amount is posted to a suspense account. Subsequently the following errors were discovered a) Sale of goods valued at Rs. 80,000 to A; posted to Nomi account. ‘ b) Purchases valued at Rs, 40,507 from Ahmed posted to debit of his account. ©) Sales Return Account under cast by Rs. 10,000. d) Petty cash balance of Rs. 1,000 omitted from trial balance. ©) Cost of repairing plant Rs. 92,000 charged to plant account as Rs. 9,000. You are required to prepare: i) Journal entries to correct the errors. ii) Suspense account(162) ILMI FUNDAMENTALS OF ACCOUNT! QUIZ Chapter -9 Question: The under mentioned errors were discovered in the books of Weak Ltd. for the year ending 31st December 2005. ‘Show what adjustments would be necessary to rectify these errors. What will be the corrected profit, if profit before the correction of the following errors was Rs. 855,000: (a) Goods amounting to Rs. 30,000 which had been returned by a customer, were taken into stock. but no entry in this respect was made in the books. (b) A purchase of goods from °S' amounting to Rs. 60,000 was wrongly passed through the sales book (©) A sales return from *R', Rs. 2,800 was wrongly passed through the sales book and from these wrongly posted to the credit of °R’ as Rs. 8,200. (d) A credit sale of Rs. 10,200 to *L' was wrongly passed through purchase book. ~ (ec) A cheque of Rs. 15,000 was deposited into for collection. This having been dis the bank was debited to dishonoured cheques account. shonoured and returned by (A purchase of goods for Rs. 40,000 from *G' Ltd. was made on 25th December, but the goods were in transit and not received till the 7th January following. (2) Rs. 3,500 for goods sold was posted to the debit of charges, although the debtors were connecting recognized. (h) Rs. 17,000 paid to W against the company's debts were by mistake debited to V's account. (i) Rs. 2,500, received from “D' as final dividend whose account had been written off as bad debi. was standing to the credit of Ds account and was included in the list of creditors.Chapter - 10 SINGLE ENTRY SYSTEM (163) Introduction Many small businesses have neither the time nor the experience necessary to maintain a full set of accounting records using the double entry system; and cannot afford the expense of outside staff to keep such records. However, every business is interested to know its profit from time to time. ‘Any set of procedures for ascertaining profits that does not provide for the analysis of each transaction in terms of the double entry system of bookkeeping is generally referred to as ‘Single Entry System Strictly speaking, single entry constitutes incomplete records rather than single entry accountin Therefore, the expression ‘Single Entry” does not mean that there is only one entry for each transaction. In fact, single entry system is a mixture of: i Double entry, ie. transaction recorded with double effect ii, Single entry, ie. transacti recorded with single effect: and iii. Noentry, ie. transaction not recorded at all Under this system, certain transactions are recorded just like the double entry system e.g cash collected from debtors. Again, certain transactions are recorded partially, e.g. cash sales, cash purchase, etc Similarly, certain transactions are not recorded at all, e.g. bad debts, depreciation, ete Single entry stem may be defined as “a system in which accounting records are not kept strictly according to the double entry principles of bookkeeping’. Types of single entry system The expression “Single Entry” covers a wide range of accounting records, starting from the brief notes of transactions kept by a hawker to elaborate records kept by a large traditional enterprise. The degree of incompleteness of records differs from one business to another according to its nature and complexity Generally, the single entry system can be classified into the following three categories: 2.1 Pure single entry system Under this system, only personal accounts’ are kept. No records are kept for real or nominal accounts, 2.2 Simple single entry system Under this system, personal accounts and cash book are kept. 2.3 Quasi single entry system Under this system, personal accounts and cash book with some other subsidiary books are kept. Limitation of single entry system Single entry system ignores the concept of duality, and therefore, transactions are not recorded in their two-fold aspects. As a result, the final accounts of the business concer cannot be prepared in the usual way. The other limitations are as under(164) 5 ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 10 Since no trial balance can be prepared, the arithmetical accuracy of the books of account cannot bbe checked. This system engenders a spirit of laxity and invites frauds and misappropriations. Since no nominal accounts are maintained, the trading and profit & loss account cannot be prepared and, consequently, the different ratios such as gross profit ratio, net profit ratio and operating ratio. etc cannot be computed. Owing to incompleteness of records. proper appraisal of the financial position of the business is not possible No limited company can keep account under this system, because of legal restrictions. Methods of single entry system There are two different methods for single entry system which are: 4d Net worth method When books of account are maintained under single entry system, it is not possible to determine profit or loss by the transaction approach because we cannot get full information regarding all transactions, The problems that arise in the single entry system for the determination of profit can be solved within the context of the fundamental balance sheet equation. Under this method, two balance sheets (Statement of affairs) are prepared. One, at the beginning of the period for finding out the ‘Opening Capital’ and the other at the end of the period for finding out *Closing Capital’, A comparison is made between the opening and closing capital Generally if the closing capital is more than the opening capital, it shows an increase in capital means a ‘Profit’. Conversely if the closing capital is less than the opening capital, it shows a decrease in capital, which means a Loss” for the period. Note that, drawings and additional capital will also be considered. This method is also known as equity / capital / net wealth ‘method, Example-1 One January 1, 2004 a trader started a business with a capital of Rs. 235,000 with which he opened a bank account. On the same day, he bought machinery for shop costing Rs. 11,280 and goods for trade costing Rs, 58,750. On December 31, his stock-in-hand was valued at Rs. 68,150 and machinery stood at Rs. 14,805 On that date, his book debts amounted to Rs. 183,300 of which Rs, 2,820 was considered to be bad. Creditors amounted to Rs. 35,250. His balance as per cash book was Rs. 12,925 a cheque for Rs. 940 sent for deposit on December 30, was not realized till after December 31, and cheque for Rs. 1,645 issued on December 29, wes not presented to bank till after December 31. Bank charges for the year amounted to Rs. 117.5 but this was not known to the trader on December 31. His drawings during the year amounted to Rs, 21,855. He had also taken for personal use goods from the shop valued at Rs. 3,925. Prepare a statement showing the trader’s profit or loss during 2004.Chapter -10 Solution-1 SINGLE ENTRY SYSTEM Statement of affairs As on December 31, 2004 (165) Liabilities — Amount Assets, [Amount | Rs, Rs, Creditors 35,250 | Machinery | 14.805 Closing capital (Bal. figure) | — 240,992.5 | Stock 68.150 | | | Book debts - 183,300 | | Less: Bad debts (2,820) 180.480 | Cash at bank (W-1) 12.807.5 | 276,242.5 276,242.5 | Statement of profit & loss _ For the year ended December 31, 2004 a [ Particulars ___ | Amount Amount Rs | ORS Closing capital | 240,992.5 ‘Add: Drawings: | Cash aN Goods 3,923 | 25.380 Less: Opening capital (235,000) | Profit for the period [3325 (wel) Working notes Cash book Particulars: | Balance b/d Balance c/d 12,9235 | R. jount_| Date [Particulars | R. | Amount Rs. 12,925 | Bank charges Note’ bank, there will be no adjustment for: (a) Cheque deposited into bank but not realized, and (b) Cheque issued but not presented But bank charges will be adjusted. Example-2 Since the amended cash book balance is to be taken as the closing balance of cash at OMER had Rs. 1,005,000 in bank on 1 January 2005 when he started his business. He closed his accounts on 31% March, 2006. His account for the bank) showed his position as follows: 31-03-05 je entry books (in which he did not maintain any 31-03-06(166) ILMI FUNDAMENTALS OF ACCOUNTING i: Chapter - 10 Cash in hand 6,700 10,050 Stock 63,650 97,150 Debtors 3,350 6,700 Creditors 16,750 10,050 On the 1" February 2005, he began drawing Rs. 2,345 per month for his personal expenses from the cash book of the business, His account in the bank had the folldwing entries Deposits Withdrawals 01-01-05 1,005,000 = (01-01-05 to 31-03-05 : 747,050 (01-04-05 to 31-03-06 770,500 904.500 The above withdrawals included payments by cheques of Rs. 670,000 and Rs, 201,000 respectively during the period form 1* January, 2005 to 31* March, 2005 and form 1* April 2005 to 31" March, 2006 for, the purchase of machinery for the business. The deposits after 31" January, 2005 consisted wholly of sale price received from customers by cheques. Draw up OMER’s statement of affairs as at 31*' March, 2005 and 31# March, 2006 respectively and work ‘out his profit or loss for the year ended 31" March, 2006, Solution-2 Statement of affairs as on April 01, 2005. _ _Amount Assets Amount | Rs | p & | Sundry ereditors 16,750 | Machinery | 670,000 | | Capital (Bal. figure) 984,900 | Debtors | 3.350 | Stock 63.650 | Cash at bank 1,005,000 Less: Withdrawals (747,050) Cash in hand Statement of affairs As on March 31,2006 ‘Amount Assets un [Rs Rs. Sundry creditors | 10,050 | Machinery 871,000 | | Capital (Bal, Figurey 1,098,800 | Debtors 6,700 | | Stock 97.150 | Cash at bank 257.950 Add: Deposits 770,500 Less: Withdrawals (904,500) 123,950 | | Z __| Cash in hand |____10,050 | _ C 1.108.850 |Chapter-10 f ENTRY SYSTEM (167) Statement of profit & loss For the year ended March 31,2006 —_ Particulars, | Closing capital | 1.098.800 | ‘Add: Drawings (2,345 x 12) | 28.140 Less: Opening capital 900) | Net profit for the year Conversion method Under the single entry system, adequate accounting information is not available and the profit disclosed by that system is not gladly accepted by the revenue authorities. For better management of the business, avoiding harassment by the revenue authorities. and facing challenge of competitors in a scientific manner, sometimes a trader may adopt the double entry system by giving up the single entry system, In the single entry system, there are varying degrees of incompleteness, and the procedure to be adopted for conversion must depend upon the nature of the records and data available, It is not possible to give a formula which can be applied in every situation. In examination problems on single entry, there will be certain missing figures, For finding out those, the relevant account is prepared. Missing figures come out by way of the following workings: > Closing balance sheet > Trading and profit & loss account For preparing the above requirements, we will make the following workings > Opening balance sheet > Debtors > Creditors > Cash > Bank > Expenses payable Example-3 MOHISIN, a trader, does not keep a complete set of books. On May 1. 2006 his debtors were Rs. 106,575 and creditors Rs. 32,625. A summary of his cash book for the year to 30!" April. 2007 showed the following totals: Bank (Rs) Credits Payments to creditors for purchases 8937.5 Debits Receipts from debtors for sales 37.5 Sale of machinery Rent of warehouse sublet 1,696.5 Cash sales . 21.750 16.312.(168) ILMI FUNDAMENTALS OF ACCOUNTING Cash capital introduced on November 01, 2006 Chapter - 10 10,875 At April, 30, 2007 the debtors and creditors respectively amounted to Rs. 191.400 and Rs. 42,412.5; Cash discount allowed to debtors were Rs. 1,000.5 and those received from ereditors were Rs. 3,523.5, Ascertain total sales and total purchases for the year. Solution-3 Total debtors D: Particulars | R. | Amount | Date | Particulars | R. | Amount 2006 | | Rs. 2007 Rs. May-01 | Balance b/d | 106,575 | Apr-30 92.437.5 2007 | Apr-30 Apr-30_| Sales (Balance) |__ 178,263 | Apr-30 | Balance e/d Total creditors Particulars | R. | Amount | Date Particulars Rs, 2006 Cash 5,872.5 | May-O1 | Balance b/d Bank 48,937.5 | 2007 Discount rece, 523.5 | Apr-30 | Purchases (Bal) Balance c/d 42,.412.5 100,746 | Calculation of total sales & total purchases, Total sales Total purchases Example-4 = Cash sales + credit Sales = 38,062.5 + 178,263 = 0+68,121 16,325.5 = 68,121 Cash purchases + Credit purchases The following is a summary of the bank account of Mr. KARIM, a trader, for the year 2008, Particulars Balance on January 1, 2008 Cash receipts on account of credit sales Balance on December 31, 2008 Bank summary 1,303,902 6313 1,337.014 Particulars Pa ment to trade creditors General Expenses Rent & Rates Drawings Rs, 1,005,051 90,789.5 1248.5 200,625 1,337,714Chapter - 10 SINGLE ENTRY SYSTEM (169) Al business takings had been paid into the bank except Rs. 113,313 out of which he paid wages amounting to Rs. 68,480. He retained Rs. 44,833 for private purposes. The following information is obtained form the books: Particulars 31-12-07 Stock in trade 130,005, Creditors for goods 104.057.5 Debtors for goods 119,840 Furniture & Fittings 53,500 31-12-08 168,525 91,431.5 143,915 53,500 Particulars Rates paid in advance Creditor for general exp. 4.33 Amount owing toa customer who had overpaid his account 31-12-07 31-12-08, 2,247 2,407.5 7.169 3.210 Discount received from trade creditors during 2008 amounted to Rs. 8,025. No discounts were allowed to customers. The amount due to the customers who overpaid hi against sales to him in 2008, ‘count was set off You are required to prepare a trading and profit & loss account for the year ended 31-12-2008 and a balance sheet as on that date. Solution-4 ‘Trading and profit & loss account . For the year ended December 31, 2008 [ Particulars Amount Particulars Amount Rs. | Rs, Opening stock 130,005 | Sales (W-2) 1,444,500 Purchases (W-3) 1,000,450 | Closing stock 168,525 Gross profit c/d 482,570 1,613,025, [1.613.025 | General expenses (W-4) 93,625 | Gross profit bie Rent & rates (W-5) 41,088 | Discount received Wages 68,480 Net profit 287,402 490,595 Balance sheet As on December 31, 2008 3 f __ Liabilities _ Amount Assets | Rs, Capital (W-1) 221,490. Furniture & fittings Add: Net profit 287,402 Stock in trade | 168,525 | 508,892, | Debtors 143,915 Less: Drawings (W-6) (245,458) 263,434 | Rates paid in advance 2407.5 - Cash at bank Creditors for goods 91,4315 Creditors for general expenses 7,169 Bank overdraft 6,313 368,347.5170) (w-l) ILMI FUNDAMENTALS OF ACCOUNTING: Chapter - 10 Working notes Balance sheet As on January 01, 2008 ___Tiabitties ‘Amount Assets Rs. Creditors for goods 104,057.5 | Furniture & fittings 53,500 | Creditors for general expenses 4,333.5 | Stock in trade 130,005 | Advance from customers 3,210 | Debtors 119,840 Capital (Bal. figure) 221,490 | Rates paid in advance 2.247 Cash at bank 333,091 (w-2) Total debtors ee Date Particulars | R.| Amount _| Date Particulars | R. | Amount Rs. Rs. Balance b/d 119,840 Balance b/d 3,210 Sales (Bal. figure) 1,444,500 Cash (1,303,902 + | 113,313) 1,417,215 Balance c/d 143,915 1,564,340 1,564,340 (w-3) Total creditors _ Date [Particulars [R[ Amount | Date [Particulars [R. | Amount Rs, Rs. Bank 1,005,051 Balance b/d 104,057.5 Discount rece. 8,025 Purchases (B,F) 1,000,450 Balance e/d 91,4315 1,104,507.5 1,104,507.5 (way Total general expenses = 90,789.5 + 7,169 ~ 4,333.5 = 93,625 (W-5) Rent & rates 41,248.5 + 2,247 — 2,407.5 41,088Chapter- 10 SINGLE ENTRY SYSTEM amy (W) Total drawings 200,625 + 44,833, 245,458 Note: Since Mr. KARIM has no manufacturing function, wages have been treated as indirect and charged to Profit & Loss Account. —(72) Question # 1: Question #2: ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 10 PRACTICE QUESTIONS Mr. BILAL commenced business on 1 January 2000, with a capital of Rs. 90.000, He immediately purchased furniture of Rs. 48,000. During the year he received from his uncle a gift of Rs. 6,000 and he borrowed from his father a sum of Rs, 10,000. He had withdrawn Rs. 1.200 per month for his house hold expenses. He had no bank account and all dealings were in cash. He did not maintain any books but the following information is given: Rs, Sales (including cash sales Rs, 60,000) 200,000 Purchases (including cash purchases of Rs. 20,000) 150,000 Carriage inwards 1,400 Wages 600 Discount allowed to debtors 1,600 Salaries 12,400 Bad debts written off 3.000 Trade expenses + 2,400 Advertisements 4,400 He used goods worth Rs. 2,600 for personal purposes and paid Rs. 1,000 to his son for examination and college fees. On 31" December 2000, his debtors were worth Rs. 42.000 and Creditors Rs. 30,000. Stock in trade was valued at Rs. 20,000. Furniture to be depreciated by 10% pa Prepare trading ard profit & loss account for the year ended on 31* December, 2000 balance sheet as at 31* December 2000. Mr. QASIM KHAN does not maintain regular books of account, The following information is available for the year ended 31-12-98: 1. Cash sales Rs. 76,800 2. Cash collections from debtors Rs. 120,000 3. A summary of the bank transactions for the year ended 31-12-98: Deposits: Rs. 191,640 Expenses Rs. 38,040; interest Rs. 360; salaries Rs. 40,800; drawings Rs. 9,600; creditors Rs. 72,000. 4 Balances as on 01-01-98 were as follows: Bank overdraft; Rs. 19,200; stock Rs. 43.200; debtors Rs. 105,600: furniture Rs, 4.800; building Rs. 72,000 creditors Rs, 38,400; cash Rs. 400 5. Mr. KHAN purchased an old motor cycle for Rs. 4,800 on 01-10-98. 6 The other balances on 31-12-98 were: Creditors Rs. 26,400; stock Rs. 48,960 and debtors Rs. 144,000,Chapter 10 Question # 3: Question # 4: SINGLE ENTRY SYSTEM (173) Prepare a profit & loss account for the year ended 31-12-98 and balance sheet as on that date afier charging depreciation @ 10% p.a on fixed assets. From the following information of M/S GORAYA & Co., prepare trading and profit & loss account for the year ending on 31-03-03 and the balance sheet as on that date (all figures in rupees): Date Car Furniture Stock Debtors Bank — Creditors 31-03-02 180,000 20,000 140,000 ‘124,000 18,000 120,000 31-03-03 180,000 20,000 180,000 92,000 32,000 - ‘The following further information is also provided (a) M/S GORAYA & Co. purchased goods for resale from further information is also provided Manufactures who allow discount of 3% on goods purchased in excess of Rs. 1.000.000 ina year. The discount for the year enced 31-03-03 was Rs. 24,960. (b) All goods are sold at a gross profit margin of 30% on selling price. (c) Bank statement for the year reveals the following payments: (all figures in rupees) Creditor 1,809,040; salaries 120,000; car expenses 46,000; traveling expenses 29.800: delivery van purchased 240,000; Misc. expenses 19,160; drawings 100,000; rent 60,000: printing & stationery 12,800; rates & taxes 6,000 and carriage outwards 37,200. (4) Depreciation on car and van @ 20% & furniture @ 10% is to be provided on balances as ‘on 31-03-03. The following are the assets and liabilities of SHAHZAD on 31-03-06 (all figures in rupees “000°: Liabilities: Capital 400; creditors 100 Assets: Fixed assets 290; debtors 100; cash 10; bank 20 A fire destroyed the accounting records as well as the closing cash on 31-03-07. However. the following information was available: (a) Debtors and creditors on 31-03-07 showed an increase of 20% as compared to 31-03-06, (©) Credit period: Debtors | month; creditors 2 months. (©) Sto k was maintained at the same level throughout the year (Cash sales constituted 20% of total sales. (©) All purchases were for eredit only (f) Current ratio as on 31-03-07 was exactly 2, (g) Total expenses excluding depreciation for the year amounted to Rs. 500,000.(74) Question #5: (h) @ ILMI FUNDAMENTALS OF ACCOUNTING Chapter -10 Depreciation was provided at 10% on the closing value of fixed assets, Bank and eash transactions: (Payment to creditors includes Rs. 100,000 by cash, (ii) Receipts from debtors includes Rs. 1,180,000 by way of cheques. . (iii) Cash deposited into the bank Rs. 240,000. (iv) Personal drawings from bank Rs. 100,000. (¥) Fixed assets purchased and paid by cheques Rs. 450,000. You are required to prepare: (a) () Hint: Trading and profit & loss account for the year ended 31-03-07, A balance sheet on that date. Assume cash destroyed is written off in the profit & loss account. ‘The following balances (all in rupees) are available from the book of Mr. CHEEMA as on 31-03- 02 and 31-03-03: Furniture (B.y) Stock Creditors Debtors Equipment Cash & bank Date 31-03-0: 162,000 100,000 240,000 170,000 108,000 120,000 31-03-03 163,800 150,000 80,000 104,000 97,200 10,000 Additional information: @ (ii) (i) (iv) co) w lis drawings were : 2001-02 Rs. 50,000; 2002-03 ~ Rs. 60,000. His total sales for 2002-03 amounted to Rs. 1,200,000. Total cash sales figure is not readily available, He always sells his goods at cost plus 25%. Payments to creditors in 2002-03 included Rs. 24,000 made from private bank account. There is no cash purchase. Debtors on 31-03-03 includes a wrong credit of Rs. 40,000 as insurance claim received towards goods costing Rs. 50,000 destroyed by fire, and a further sum of Rs. 4,000 was recovered from a customer whose account was written off in 2001-02. During the year goods costing Rs. 12,000 were distributed as free samples. Discount allowed to debtors Rs. 24,000 and discounts received from creditors Rs. 16,000. Depreciation is charged @ 10% on furniture and equipments Prepare a trading-and profit & loss account for the year ended 31-03-03 and balance sheet as on that date.Chapter -10 SINGLE ENTRY SYSTEM (075) ‘Question #6: An analysis of the records of Kashif Ahmed disclosed changes in account balances for 1992 an supplementary data as listed below. Form this data, calculate the net income or loss for 1992 Rs. Cash 195,000 Increase Trade debts. 45,000 Decrease Finished goods stock 420,000 Increase Bills payable 150,000 Increase Trade creditors, 75,000 Increase During the year Kashif Ahmed borrowed Rs. 360,000 from the bank and paid off bills of Rs.450,000 and mark up of Rs.22,500, Mark up of RS. 7,500 is accrued as of December 31 1992. In 1992, Kashif Ahmed also transferred certain investments that he owed to the business and these were sold for Rs. 126,000 to finance the purchase of merchandise. Kashif Ahmed made weekly drawings of Rs. 4,500 in 1992, Question #7: The Accountant discerns the following details of transactions for Panorama retail store for the year ended 31st December, 1991. (a) (b) © (d) te) 1) The sales are mostly on a credit basis. No records of sales have been made but Rs. 10,000 has been received, Rs. 9,500 by cheque and Rs. 500 by cash, from persons to whom goods have been sold. Amount paid by cheque to suppliers during the year = Rs. 7,200, Expenses paid during the year: by cheque, Rent Rs. 200, General Expenses Rs, 180, by cash Rent Rs. 50. ‘The owner took Rs. 10 cash per week (for two weeks) as drawings. Other information available is: As at 31.12.90 Asat 31.12.91 Rs, Rs. Debtors 1,100 1,320 Creditors for goods 400 650 Rent Owing - 50 Bank Balance 1,130 3,050 Cash Balance 80 10 Stock 1,590 1,700 ‘The only fixed assets consists of fixtures which were valued at 31 December, 1990. at Rs.800. These are to be depreciated at 10 per cent per annum. You are required to prepare trading and profit & loss account and balance sheet alongwith other related accounts on 31st December, 1991(176) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 10 ASSIGNMENT MATERIAL A.M#1: Youre given: a) The balance sheet of A on Ist April, 1971 b) The cash transactions for the year up to March 31, 1972, ©) Asummary of the remaining transactions. 2) Rs. Rs, Bank overdraft 500 Cash in hand 10 Sundry creditors 3,600 Bills receivable 2,00 Bills payable 1,600 Sundry debtors 3,900 Capital 20,000 Stock of goods 7,530 Plant and machinery 4,700 Land and buildings 7,000 25,200 b) Rs, Rs. To Balance b/d 70 By Overdraft 500 To Receipts from Debtors 29,000 By Salaries 4,900 To Bills Receivable 10,000 By Wages 1,580 ‘To Cash Sales 3,700 By Payment to Creditors 14,700 By Office Expenses 800 By Drawings 4,500 By Investments at par (6% GP Notes on Ist Oct., 1971) 15,300 By Balance on 31st March, 1972: Cash 40 Bank 480 _490 42,710 ° Rs. Sales (Credit) 40.700 Discount to customers 200 Purchases 30,000 Discount received 100 Bills Receivable received 10,900 Stock of Goods on March 31, 1972 5,300 Provide for doubtful debts at $% on debtors outstanding, Provide for depreciation on Plant and Machinery at 5% and on Land and Buildings at 24%. Prepare the trading and profit and loss account and the balance sheet. A.M#2: White carries on a small business, but he does not maintain a complete set of account books. He banks all receipts and makes all payments only by means of cheques. He maintains properly a Cash Book, a Sales Ledger and a Purchases Ledger. He also makes a proper record of the assets and liabilities as at the close of every accounting year. From such records you are able together the following facts: {Receipts for the year ended 31st Dec., 19.5 From Sundry debtors Cash sales Rs, 17,625 4,125Chapter -10 SINGLE ENTRY SYSTEM a7) A.M #3: Paid in by White, the proprietor 2,500 24,250 Payments made in the year ended 31st Dec., 19.5 New plant purchased Drawings Wages Salaries Interest paid Telephone Rent Light and power Sundry expenses Sundry creditors (Purchase Ledger Accounts) Assets and Liabilities: Asat3ist Asat31" Dec. 19.4 Dee. 19.5 Rs. Rs. Sundry creditors 2,525 2,400 Sundry debtors 3,750 6,125 Bank 625 Stock 6,250 3,125 Plant 7,500 7315 From the above data, prepare the profit and loss account for the year ended 31st Dec., 1975 and the balance sheet as on that date, A trader asks you to prepare a balance sheet and profit and loss account for the year ended 31st December, 1975. He has kept no books of account, but his system is as follows:~ He keeps copies of all invoices in respect of credit sales and marks each copy with the date of payment. He does not keep copies of cash memos but he informs you that all takings, both cash and credit, are paid into the bank, except that he occasionally with-holds certain sums. both for personal use and for petty cash expenses, which he notes in a note-book. Analysis of the Pass Book reveals the following:- Rs. Total amount paid into Bank 45,550 Expenditure- Personal drawings 3.000 Purchases 35.400 Salaries 2.500 Rent 1.200 Elcotric Light 350 Printing and Stationery 250 Advertising 450(178) AM#4: ILMI FUNDAMENTALS OF ACCOUNTING. The cash at bank on 31st December, 1975, was Rs. 400. The personal drawings shown in the note-book amount to Rs. 1,200, and for Petty Cash Rs. 300. Scrutiny of the copy invoices shows that Rs, 2,250 was paid into the Bank during 1975 in respect of 1974 sales, and that Rs. 4,675 is outstanding in respect of 1975 sales, exclusive of four bills totalling, Rs. 425, which have been marked "Irrecoverable”. Liabilities were- Bist Dec.1974 31st Dec.1975 Rs. Rs. Purchases for creditors 2,400 3,500 Rent 100 100 Electric light 20 15 Advertising 250 ‘The Stock at 31st December, 1975, was Rs. 3,500 (at cost) but the trader has no record of the Stock at 31st December, 1974. He informs you, however, that he invariably sells his goods at cost plus 334%. Prepare the balance sheet and profit and loss account. ‘The following information is supplied, from which you are required to prepare Trading and Profit and Loss Account for the year ended and Balance Sheet as on 31st December 19.3, Assets and Liabilities Jan 01,193 Dec 31, 19. Rs. Rs, Creditors 15,770 12.400 General Expenses Owing 600 330 Sundry Assets 11,610 12,040 Stock 8,040 11,120 Cash in hand and at Bank 6,960 8,080 Debtors ? 17,870 Other Transactions: Cash and discount credited to Debtors 64,000. Returns from Debtors 1,450 Bad Debts 420 Sales-Cash and Credit 71,810 Discounts allowed by creditors 700 Returns to creditors 400 Capital introduced (paid into Bank) 8,500 Receipts from Debtors (""") 62,500 Cash purchases 1,030 Expenses paid by cash 9,570 Purchase of machinery by cheque 430 Drawings by cheque 3,180 Cash payments into Bank 5,000 Withdrawn from Bank into cash 91240 Payments to creditors by cheque 60,270 Cash in hand at end 1,200Chapter -10 AM#5: INGLE ENTRY SYSTEM 79) Sikandar who cartied on a retail business engaged an assistant at Rs. 200 per month who started work on Ist January, 1990. On Ist April, 1990, the Assistant did not report for work and it was found that he had left, taking with him the balance in the till. It had been Sikandar's practice to bank each Monday morning the balance in the till resulting from the previous week's transactions. No float was maintained The only records kept, apart from the bank statement, were a note-book with details of sales on credit and a file of unpaid invoices for goods supplied to him. Having been instructed to establish the ‘amount of the assistant's defaleation, you ascertain the following: (1) A balance sheet has been prepared on 31 December, 1989, as follows Rupees Rupees Capital 3,620 Fixture and fittings 2,500 Creditors for goods 2,470 Stock in trade 1.720 Creditors for expenses Debtors 860 Balance at bank 1,260 6,340 (2) Ananalysis of the bank statement up to 31 March, 1990 was Rupees Rupees Balance on 31December, 1989 1,260 Creditors for goods 9.370 Deposits: Debtors cheques 450 Rent & expenses 580 Cash 9,720 Balance, 31 March 1990 1.480 11,430 1.430 (3) Before paying in the balance in the till, Sikandar paid the assistant and took Rs. 400 for himself every month. (4) Petty expenses, paid out of the till, could be assumed to average Rs. 80 per month (5) Stock taken at the commencement of business on Ist April, 1990 was Rs.900 (6) The debtors note-book showed that sales on credit had amounted to Rs. 990 and that on Ist March, 1990 there was Rs. 1,020 owing. (7) Creditors for goods had always been paid by cheque. Unpaid invoices on March 31, 1990 totalled Rs. 2,800. Creditors for expenses amounted to Rs. 200 on 31st March, 1990. (8) Debtors and creditors having been circularized, it was found that debtors in fact totalled Rs. 840 and that although creditors were agreed at Rs. 2,800, goods had been returned against at cash receipt of Rs. 120 which had not been recorded, (9) There was a fixed margin of gross profit of 20% on sales, (10) An insurance company had agreed to admit a claim for the amount of the defalcation as established by you. You are required a) to prepare a statement, with adequate supporting schedules, showing your calculation of defalcations; and b) to prepare a balance sheet as on March 31, 1990.(180) AM#6: ILMI FUNDAMENTALS OF ACCOUNTING. Chapter 10 X keeps his books of accounts on single entry system. The following information is disclosed:~ Jan 01, 1984 Assets and Liabilities: Rupees Fixture and fittings 2,000 Stock 1,000 Debtors 2,100 Cash 150 Creditors 1,750 Bills payable Nil Loan by Y Nil Investment at 31st December, 1984 Nil Dec 31, 1984 Rupees 2,000 1.250 3,400 200 1,900 300 500 1.000 X has drawn Rs, 500/- on account of his profit. Fixture and fittings are to be written down to Rs 1,800/- and Mr. X wishes to create bad debts provision of 10% on debtors. You are required to prepare: a) b) °) Capital account as at 31st December, 1984. Statement of profit for the year ended 31st December, 1984, Balance sheet as at 31st December, 1984.Chapter -10. SINGLE ENTRY SYSTEM (asi) QUIZ Question: Mahesh, who keeps his books by single entry, has submitted returns to the Income Tax Authorities showing his income to be as follows: Rs. Year ending December 31, 1959 7,350 Year ending December 31, 1960 7.400 Year ending December 31, 1961 7.870 Year ending December 31, 1962 13.750 Year ending December 31, 1963 12,140 Year ending December 31, 1964 9,260 The income tax o! 1 is not satisfied as to the accuracy of the accounts submitted. You are instructed to assist in establishing their correctness, and for that purpose you are supplied with the following information:~ a) b) ° d) D. Business liabilities and assets at 31st December, 1958 were: Debtors, Rs. 1,450 : Cash at Bank and in hand, Rs. 9.470 ; Stock, Rs. 5,420 (at selling price which is 25% above cost); Creditors, Rs. 7,320. Mahesh owed his brother, Rs. 4,000 on 31st December, 1958. On 15th February, 1961 he repaid this amount, and on Ist January, 1964 he lent his brother, Rs. 3,000. Mahesh owns a house which he purchased in 1954 for Rs. 20,000 and a car which he purchased in 1960 for Rs. 7,500, In 1963 he bought Rs. 10,000 shares in X Ltd., for Rs. 7,500. In 1964 Rs. 3,000 was stolen from his house. Mahesh estimates that his living expenses have been : 1959, Rs. 3,000; 1960, Rs. 4,000; 1961, Rs. 6.000; 1962, 1963 and 1964 Rs. 7,000 per annum exclusive of the amount stolen. On 31st December, 1964 the business liabilities and assets were: Creditors Rs. 8,400; Debtors, Rs. 5,920 Cash in hand and at Bank, Rs. 19,450 and Stock, Rs. 6,740 (at selling price which shows a gross profit of 25%). From the information submitted, prepare a statement showing whether or not the income declared by Mahesh is, correctChapter - U1 INVENTORIES (183) 1 Introduction Inventory is one of the current assets of a business concern. The major source of revenue is the sale of these inventories and should be properly compiled periodically and recorded in the books of account for proper measurement of periodic profit and for inclusion in the balance sheet at the end of the accounting, period . For a trading company, the inventory includes all goods owned and held for sale in the ordinary course of business. But for a manufacturing business, there are three major types of inventories 1 Raw materials (to be currently consumed in the production of goods or services to be available for sale), Work-in-process (are in the process of production for such sale). 3. Finished goods (are held for sale in the ordinary course of business). A major objective of accounting of inventories is the proper determination of income through the process of matching appropriate costs against revenues, Accounting for inventories ‘Amount of inventory affects the cost of goods sold (and hence, the profit for the period) and the total of the current assets section in the balance sheet. Therefore, itis important to have an accurate valuation of inventory, the most important current assets in the balance sheets of many businesses. Inventory valuation includes 1. Acchoice between the “Periodic Inventory System” and “Perpetual Inventory System’ 2. Determination of cost 3. The basis of inventory valuation — lower of cost and net realizable value. Normal loss vs abnormal loss The loss of input or output where the occurrence is inevitable ie., which occur on account of normal reasons are known as normal losses. Whereas the loss of input or output whose occurrence can be avoided i.e., which occur on account of abnormal reasons are known as abnormal losses. Periodic and perpetual inventory systems We will discuss them one by one: 4.1. Periodic inventory system Under this system, only a physical inventory is usually taken at the year-end i... the inventory on hand is determined by means of physical count at periodic intervals or at the end of the petioa. ‘Advantages Followings are the main advantages on perpetual system:IDE a (184) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -11 Protects material against theft or loss. 'i, Production process need not be stopped for physical stock taking UH Helps in prompt preparation of financial statements by providing the stock figure. '¥. Proper recording of consumption helps in future planning, ¥- Difference between physical counts and book balance can be investigated. 4.2 Perpetual inventory system 1n Perpetual inventory system, an inventory account is prepared and all purchases & issues are recorded init. This account also provides the balance of ending inventory Advantages Followings are the main advantages on periodic system: i. No record of inventory is to be maintained. Itis cost effective (cheaper) 43 Journal entries je — Entry Periodic Perpetual Opening stock u an x Purchase of inventory cf a een Freight paid Cues] ero | Return of inventory to ‘Suppliers ‘Suppliers =| [supplier Purchases eturn | | Inventory | Ist t | | | Debtors | Sales Sale on inventory Peers | / . 2nd | Cost of goods sold Inventory Ist | Sales return I is. Debtors Return of goods by customers | S#!es ae 5 | " 2nd | | Inventory CasChapter -11 INVENTORIES, = 185) - Cost of goods sold Normalloss | Xx rey normal | ‘Abnormal loss Abnormal loss Abnormal loss _ Purchases Inventory | | Stock | ost 6 x Closing stock Trading _ CGS transferred to profit & | Profit & loss account Profit & loss account loss account CGS CGS 44 Comparison between periodic and perpetual inventory system —Charagivristices | "Periodic _ Perpetual — [Financial accounting Cost accounting — Has to be made on the event | Valuation: of preparing financial Always available in ledger | statement, Closing adjustment ‘Always incorporated No need, Shocheat May just to ensure accuracy | Physical count Must i ee as Directly charged to trading | 7, sated as stock | account eek | Recording of issues No need Always recorded Recording of losses, ete. ‘No need ‘Always recorded Figure of consumption (CGS) | Computed one Given in the ledger Appearance of closing stock | Both in rading account and | (in che balance sheet figure balance sheet ee Only amount is adjusted in| Difference of cost and NRV Adjustment of NRV. the adjusting entry is recorded as expense ‘Opening stock Cost of goods sold eae Purchases Closing stock | 5. Valuation of inventory, A very important valuation problem arises while assigning costs to inventory items. No problem would arise if prices never changed. Once the unit cost of each inventory item is known, some method must be used to assign costs to closing inventory and cost of goods sold. Following are the important cost assigning inventory methods. 5 First-in-first-out (FIFO) This method is based on the assumption that the first item purchased is the first item sold that is. all the inventories are sold in the order in which they are acquired. Since the oldest stock in the inventory is sold first, the calculation of the inventory is on the basis that the inventories in hand represent the ones most recently purchases or produced and the cost of goods sold represents the ‘cost of items acquired in the earlier purchase. Advantages Followings are the main advantages of FIFO method:(186) ILM FUNDAMENTALS OF ACCOUNTING ‘Chapter - 11 > FIFO method is more close to logic than any other method. Concept of goods coming in first going out first appeals to intuition. > In FIFO method goods are issued at actual prices, means the prices at which they were bought. > When measuring closing stock under FIFO, goods in hand (closing stock) is assigned the most recent purchase prices. This takes into account the effect of inflation. > FIFO isan acceptable stock valuation method as per International Accounting Standard Disadvantages Followings are the main disadvantages of FIFO method: > Under FIFO method, as goods first in are the first ones to go out, so goods issued are at old rates. This does not take into account the effect of inflation. > Closing stock is priced at recent rates, taking inflation into account this may cause closing stock to be overstated. Thus having an unfair impact on financial statements. Exomple-1 Prepare the stock ledger card for the month of January ftom the following information using FIFO method: The balance at the start of month is 1,000 units @ Rs. 1 each. Futher purchase and issue are as under: Date Receipt Rate Issue Jan-07 6,000 1s : Jan-17 - : 2,000 Jan-24 3,500 2 - Jan-31 - - 500 Solution-1 Store ledger card Date Receipts Issues Balance Qy @ Rs ay @ Rs Qty @ Rs. JanO1 1,000 __1.00_1,000 Jan-07 6,000 1.50 9,000 1,000 1.00 1,000 6,000 _1.50 9,000 Jan-17 1,000 1.00 1,000 1,000__1.50_1,500 5,000__1,50_7,500 Jan-24 3,500 2.00 7,000 5,000 1.50 7,500 3,500__2.00_ 7,000 Jan-31 300 1.50750 4,500 1.50 6,750 3,500__2.00 _7,000 Valuation of closing stock $,000_}3,750Chapter = 11 52 INVENTORIES (187) Weighted average method (Perpetual) This method can only be applied with the perpetual inventory method. Under this method, an average cost per unit for the items in the inventory is computed after each purchase, The following formula is used to ascertain average cost per unit: Total cost inventory on hand (after each purchase) Average cost per unit = FF an Total number of units in inventory on hand (after each purchase) Advantages Followings are the main advantages of weighted average method: > Weighted Average method is an acceptable stock valuation method as per Intemational Accounting Standards, > Under weighted average method, goods issued in one go are priced at a calculated price thus assigning equal value to all the goods issued. ~ Under weighted average method as goods are priced at a weighted average cost; closing stock is not inflated, as is the case in FIFO. Disadvantages Followings are the main disadvantages of weighted average method: > Under weighted average method goods are not issued at actual price but rather at a calculated price % Under this method, closing stock is not measured at actual prices, as is done under FIFO, Under this method, a new rate is calculated with each new delivery of goods. Thus giving a calculated price of goods received. Example-2 Prepare the stock ledger card for the month of January from information of example-1 using, weighted average method (Perpetual): Solution-2 Stock ledger card (Weighted average — Perpetual) Date Receipts Issues Balance Qty @ Rs Oy. @ Rs. Qy. @ Rs Jan-O1 __1.900__1.00 Jan-07 6,000 _1.50 9,000. 7,000 1.4286 10,000 Jan-17 0 2,000 1.4286 2,857 5,000 1.4286 7.143 Jan-24 3,500 __2.00 _7,000 ___£,500 1.6638 14,143. Jan-31 _500_1.6638 832, 8,000_1.6638 13,311 Valuation of closing stock 8,000 13,311(188) 53 ILMI FUNDAMENTALS OF ACCOUNTING Chapter 11 Weighted average method (Periodic) Under this method, the costs to be assigned to inventories are ascertained by applying 10 the closing inventory an average cost computed by dividing the total cost of units by the total number of such units. The average cost is calculated by applying the following formula: Opening Inventory + Purchaes(Amount) Weighted Average cost per unit = (Opening Inventory + Purchases(Units) The value of the closing inventory is ascertained by multiplying the number of units on hand (from the physical count) by the weighted average cost per unit, Under this method, inventory is valued at an assumed cost instead of actual cost. This is because this method assumes that all items available for sale during the year were acquired at an average cost, and that all items sold hold this same average cost. Example-3 , Prepar: the stock ledger card for the month of January from information of example-1 using weighted average method (Periodic): Solution-3 Stock ledger card (Weighted average — Periodic) Date Receipts Issues Balance ay @ R Qy. @ Rs Qy. @ Rs JanO1 1,000 _1.00 1,000 Jan-07 6,000 4.50 9,000 7,000 1.4286 10,000 Jan-24 3,500 2.00 7,000 10,500 1.6190 17,000 Jan-31 2,500 1.4286 4,048 8,000 1.6190 12,952Chapter—11 INVENTORIES (189) Question # 1: Question # 2: PRACTICE QUESTIONS Jahangir Ltd. uses large quantities of sweetening material for its products. The following figures relate to this material during the year 2004: Quarters Ended Purchases Invoice Cost Per Kg Consumption Kgs March 31 2,000 1,240 1200 June 30 4,200 1,260 2400 Sept. 30 1,400 1,280 3000 Dec. 31 2,400 1,340 270 Market replacement costs, December 31,2004 1,320 December 31,2003 1,220 The stock of material on December 31, 2003 was 1000 Kgs valued for accounting purposes at cost of Rs. 1200 per Ke, Delivery of goods to the factory is made on the first day of each quarter You are required to compute the value of the stock as on December 31, 2004 applying (i) FIFO and (ii) Weighted Average. At the beginning of October 1974, Quality Brush Company had in stock 10,000 brushes valued at Rs. 10 each, Further purchases were made during the month as follows: ‘7th October 4,000 Brushes @Rs. 22.50 Lath October 6,000 Brushes @Rs. 15.00 24th October 8,000 Brushes @Rs. 16.50 Issues to shop floor were as follows: 16th October 16,000 Brushes 28th October 10,000 Brushes ‘You are required to compute the value of closing stock: (@) On the basis of first in first out principal, and (b) Weighted average method.(190) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 11 ASSIGNMENT MATERIAL AM# I: S. Ltd. uses large quantities of a sweetening material for its products. The following figures relate to this material during the calendar year 1980: Quarter ended Purchases Invoice Cost Per tonne Consumption : (Tonnes) Rs. (Tonnes) March 31 - 1,000 620 600 June 30, 2,100 630 1,200, ‘September 30 700 640 1,500 December 31 1,200 670 1,350 Market replacement costs: December 31, 1980 660 December 31, 1979 610 The stock of material on December 31, 1979 was 1,000 tonnes valued for accounting purposes at cost of Rs.600 a tonne. Delivery of goods to the factory is made on the first day of each quarter. You are required: (a) to compute the value of the stock as on December 31, 1980, applying (i) FIFO, and (ii) Weighted average; and (b) for internal accounting to compare the effects, on the 1980 profits, of adopting each of the foregoing valuation methods in place of valuations based wholly on market replacement cost.Chapter— 11 INVENTORIES ag) QUIZ Question: Oil India is a bulk distributor of high octane petrol. A periodic inventory of petrol on hand is taken when the books are closed at the end of each month. The following summary of information is available for the month of June, 1977: Sales Rs. 945,000 General administration cost Rs. 25,000 Opening stock 100,000 litres @ Rs. 3 per litre Rs. 300,000 Purchases (including freight in): June 01: 200,000 litres @ Rs, 2.85 per litre June 30: 100,000 litres @ Rs, 3.03 per litre Closing stock on June 30" 130,000 liters Compute the following data by the FIFO and weighted average method of inventory costing: (@) Value of inventory on June 30. (b) Amount of the cost of goods sold for June. (c) Profit or loss for JuneChapter - 12 STATEMENT OF CASH FLOW: (193) 1 FLOWS Introduction One of the key factors to run a business is the availability and best utilization of cash. As it has been earlier studied that profit & loss account is prepared on accrual basis and it does not show the utilization and availability of cash Statement of cash flows is the statement which shows the receipts (inflows) and payments (outflows) made by the entity during the year and also the balance at the year end. From analysts, investors and creditors’ point of view, Statement of cash flows is highly important because it provides them information regarding liquidity position of the entity and helps them to make relevant decisions. Profitability and liquidity Liquidity is the key. Now-a-days, something is generally considered as sufficiently liquid to be deseribed as cash in this contest, if it can definitely be tured into cash within three months, It also includes funds invested in ‘cash equivalents’. These cash equivalents consist of the temporary investments of cash not required at present by the business, such as funds put on short-term deposit with a bank, Such investments must be readily convertible into cash or available as cash within three months, Ifa business is making profits then it does not mean that there should be no shortage of cash. Some time business goes in huge profits but it has to face cash shortage. Following are a few instances where. although reasonable profits are being made by each of the following business, they could find themselves short of cash, may be not now, but at some time in the future. > A sole trader is making Rs, 40,000 y 60,000 a year for sometime, ly profits. However. his drawings have been over Rs. > A major supplier is experiencing cash flow problems and is threatening not to provide any further goods unless all bills are paid within $ working days. Business has no other source of supply for these goods and he has indicated that it will not advance any further loans or increase the overdraft facility > A seriously dangerous defect has been identified in the sole product manufactured by the business. This could lead to all items sold in the last year having to be replaced with newly produced. The faulty items cannot be repaired. The business has already borrowed as much as it is allowed by the bank. Presi The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities. An entity presents its cash flows from operating, investing and financi activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents. This information may also be used 0 evaluate the relationship among those activities. ¢ transaction may include cash flows that are classified differently. For example, when the cash Fepayment of a loan includes both interest and capital, the interest element may be class activity and the capital element is classified as a financing activity ied as an.(194) 31 33 ILMI FUNDAMENTALS OF ACCOUNTING. Chapter - 12 Operating activities Cash flows from operating activities are primarily derived from the principal revenue producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. Examples of cash flows from operating activities are: i Cash receipts from the sale of goods and the rendering of services. Cash receipt from royalties, fees commission and other revenue, Cash payments to suppliers for goods and services. iv. Cash payments to and on behalf of employees. v. Cash payments of income taxes. Investing activities ‘The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended 10 generate future income and cash flows. Examples of cash flows arising from investing activities are: i. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets, ii, Cash receipts from sales of property, plant and equipment, intangibles and other long- term assets. iii. Cash payments to acquire share certificates, etc. iv. Cash receipts from sale of share certificates, ete, Vv. Cash advances and loans made to other parties. vi. Cash receipts from the repayment of advances and loans made to other parties. Financing activities The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Examples of cash flows arising from financing activities are: i Cash proceeds from issuing shares (Capital contribution). ji, Cash payments to owners (Drawings), iii, Cash proceeds from loans. iv. Cash repayments of amounts borrowed,Chapter 12 STATEMENT OF CASH FLOWS (195) Example-1 Identify operating, investing and financing activities from the following: (a) cash received from debtors; (b) cash received from sale of goods; {c) cash received from sale of fixed asset; (4) cash received from issue of shares; (e) cash repayments of amount borrowed; (0) dividend received; (@) dividend paid; (h) wages paid to employees; (i) interest paid; (i) interest received; (k) purchase of fixed assets; () acquisition of fixed asset by Issue of shares; (m) cash advances to suppliers; (n) taxes paid; (0) depreciation charge for the year; (P) cash paid to purchase goods; (q) loan given by the company to its subsidiary company. Solution-1 Operating activities (2), (b), (8. (hd. (D, (an), (2), (P), D Investing a S ©), (, @. 9), @) Financing activities (4), (©), (e). ( None of the above: (), (©) 4 Methods of reporting cash flows An entity shall report cash flows from operating activities using either: i The Direct Method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or(196) Example-2 ILMI FUNDAMENTALS OF ACCOUNTING. The following data relates to Jami Sons: Jami Sons Profit and Loss Account For the year ended December 31, 2000 Rs. Sales 1,000 Cost of goods sold 650 Gross profit 350 Depreciation 100] Administration expenses 100} Mark-up 0 250 Net profit before tax 100 Taxation 40 Profit after tax 0 Balance Sheet As at December 31, 2000 2000 1999 Assets Rs, Rs. Fixed assets 550 500 Current Assets: Stocks 770 750] Trade debtors 520 500) Cash 60) 50) 1,350 1350 1,900 1,800 Equity and Liabilities Capital bid 800 ‘Add: Profit 60 860 800 Loan payable 440 200 Current Liabilities: Mark-up payable 80) 160 Bank overdraft 270 300] Trade creditors 250] 340) 600 300 1.900 1,800 Chapter - 12 The Indirect Method, whereby profit or loss is adjusted for the effects of transactions of a non cash nature, any deferrals or accruals of past or future operating cash receipts or payments. and items of income or expense associated with investing and financing cash flows. Required: Prepare a statement of cash flows of Jami Sons for the year ended December 31, 2000 by using direct & indirect method,Chapter -12 STATEMENT OF CASH FLOWS 197) Solution-2 Jami Sons Statement of cash flows (Direct method) For the year ended December 31, 2000 Cash flow from operating activates Rs. Rs. Cash received from debtors (W-1) 980 Cash paid to supplies (W-2) (760) Expenses paid (100) Cash generated from operat 120 Interest paid (W-3) (130) Taxes paid (40) Net cash flow used in operating activities (50) Cash flow from investing activities Fixed assets acquired (W-4) (150) Net cash flow used in investing activities (150) Cash flow from financing activities Loans raised Net cash flow fom financing activities 240 Net increase / (decrease) in cash & cash equivalents 40 Opening balance of eash & cash equivalents )) Closing balance of cash & cash equivalents 210) ‘ Workings notes why Debtors, Rs, Balance b/d 500 Cash Sales Balance c/d (w22) Rs. Cost of Sales 650 Less: Opening stock (750) Add: Closing Stock m0 Purchases 670 Creditors Rs, Rs. Cash 760 Balance c/d 340, Balance e/d 250 Purchases 670 L010 1,010ILMI FUNDAMENTALS OF ACCOUNTING (198) Chapter - 12 ) Mark-up payable Rs, Rs. Cash 130 Balance b/d 160 Balance c/d 80 Profit & loss 50, 210 210 (w-4) Fixed asset Rs. Rs. Balance b/d 500 Depreciation 100 Cash 150 Balance e/d 550 650 650 (ws) Cash & cash equivalents Opening balance Closing balance Cash 60 Bank overdraft (270) 210) ‘Statement of cash flows (Indirect method) For the year ended December 31, 200 Cash flow from operating rates: Rs. Rs, Profit before tax. 100 Adjustments: Depreciation 100 Mark-up. 50 Operating profit before working capital charges 250 Increase in stocks (20) Increase in debtors (20) Decrease in creditors (90) Cash generated from operatis ' 120 Mark-up paid (W-1) (130) ‘Tax paid (40) Net cash flow from operating activities (50) Cash flow from investing activities Fixed assets acquired (W-4) 150) Net cash flow used in investing activities (150) Loans raised 240 Net cash flow from financing activities 240 Net increase / (decrease) in cash & cash equivalents 40 ‘Opening balance of cash & cash equivalentsChapter 12 STATEMENT OF CASH FLOWS (199) Closing balance of cash & cash equivalents (210) Workings notes (w-l) Mark-up payable Rs. Rs. Cash 130 Balance bid 160 Balance e/d 80 Profit & loss 50 210 210 (W-2) Fixed assets Rs, Rs, Balance b/d 500 Depreciation 100 Cash 150 Balance e/d 350 650 650(200) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -12 Formats of statement of cash flows (Direct method) Statement of eash flows For the year ended 31 December 20x5 2014 2013 Cash flow from operating act Rs. Rs. Cash received from customers XXX XXX Cash paid to suppliers 0X), (XX), Expenses paid XXX) (XXX) Cash generated from operations XXX Interest paid (OX), (XXX) Income tax paid 00x) (XXX) Net cash from operating activities (A) XXX XXX Cash flow from investing acti ties Acquisition of shares, debenture ete (XxX) Purchase of property, plant and equipment (XXX) Proceeds from sale of equipment XXX Interest received XXX Dividend received XXX Net cash from / (used in) investing activities (B) (Xxx) Cash flow from financing activities Proceeds from issuance of share capital / Additional capital XXX XXX Proceeds from long-term borrowings XXX Payment of finance lease liabilities (XXX) Dividend paid* / Drawings (Xxx) Net cash from / (used in) financing activities (C) XXX Net increase / (decrease) in cash & cash equivalents (A+B+C) XXX XXX ‘Cash & cash equivalents at the beginning of the period, XXX XXX Cash & cash equivalents at the end of period XXX XXX *Dividend paid could also be shown as an operating cash flowChapter - 12 STATEMENT OF CASH FLOWS: (Indirect method) Statement of cash flows For the year ended 31 December 20x5 Cash flow from operating activities Profit before tax ‘Adjustment for: Depreciation Loss on sale of property Profit on sale of investment Investment Income Interest expenses Goodwill written off Amortization of intangible assets Operating profit before working capital changes Changes in working capital Increase in trade receivables Decrease in inventories Decrease in prepayments Decrease in acerued expenses Decrease in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities (A) Cash flow from investing activities Acquisition of shares, debenture ete Purchase of property, plant and equipment Proceeds from sale of equipment Interest received Dividend received Net cash from / (used in) investing activities (B) Cash flow from financing activities Proceeds from issuance of share capital Proceeds form long-term borrowings Payment of finance lease liabilities Dividend paid* / Drawings Net cash from / (used in) financing activities (C) Net increase / (decrease) in cash & cash equivalents, Cash & cash equivalents at the beginning of the period Cash & cash equivalents at the end of period *Dividend paid could also be shown as an operating cash flow. 2014 XXX XXX XXX (XXX) (XXX), XXX XXX XXX XXX (XXX) XXX XXX (XXX) OH) XXX (XxX) XXX) XXX (XXX), (XXX) XXX XXX XXX (XXX) XXX XXX (XXX) (XXX) XXX XXX(202) ILMI FUNDAMENTALS OF ACCOUNTING Chapter ~12 PRACTICE QUESTIONS Question #1: The balance sheet of ABC Brothers as at 30 June 2003 and the profit and loss account for the year then ended are as follows: ABC Brothers Balance sheet As on 30 June 2003 Assets Land Building Less: Accumulated depreciation Inventory Prepaid expenses Trade debts Cash’ Equity and liabilities Opening capital 146,000 Add: Additions 10,000 ‘Add: Profits 69,000 Less: Drawings 49,000) Long Term loan Accounts payable Income taxes Accrued lial ABC Brothers Profit and loss account 2003 Rs. 30,000 170,000] 20,000 y 130,000 4,000 92,000 5,000 411,000 176,000 175,000 49,000 5,000 6,000 411,000 For the year ended 30 June 2003 Sales Cost of goods sold Gross profit Selling and administration expenses Interest expense Profit before tax. Taxation Profit after tax ‘The expenses include depreciation as follows: Cost of goods sold Selling and administration expense 2002 10,000 30,000] 10,000) 720,000 85,000 6,000 70,000 28,000 ~ Required: Prepare statement of cash flows for the year ended 30 June 2003 in accordance with IAS-7Chapter- 12 STATEMENT OF CASH FLOWS. Question #2: Draw up a statement of cash flows for John Flynn for the year ended 31 December 20x9. Question # 3: Johan Flynn Balance sheets ‘Ason 31 December 2008 Fixed assets Rs. Rs. Building 5,000, Fixtures (Less depreciation) 1,800 Van (Less depreciation) 2,890 9,690 Current assets Stock 3,000 Trade debtors 4,860 Bank 3,100 Cash 350. 11,310 Current liabilities Creditors 2,900 Bank overdraft = (2,900) 8.410 18,100 Loan (Repayable in 10 years’ time) 2,000) 16,100 Represented by capital account Balance at 1 January 15,500 ‘Add: Net profit for the year 6,800 Cash introduced =e) 22,300 Less: Drawings (6.200) 16,100 Rs. 8,410 5,970 150 14,530 2,040 1,260 (3,300) (203) 2009 Rs. 5,000 2,000 5,470 12,470 11,230 23,700 5,000) ‘You are told that fixture bought in 20x9 cost Rs. 400, whilst a van was bought for Rs. 4,000. ‘Malcolm Philips is a sole trader who prepares his accounts annually to 30 April. His summarized balance sheets for the last two years are shown below: Balance Sheets as on 30th April Fixed assets Less: Provision for depreciation Current Assets: Stock 43,100 Trade debtors 3,900 Bank 1,500 8,500(204) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 12 Current liabilities Trade creditors 2,000 2,200 - Bank overdraft = (2,000) 6,500 900 (3.100) 6,200 20,500 23,000 Represented by capital account: Balance at | May 20,000 20,500 ‘Add: Net profit for the year 7,000 8,500 Additional capital introduced = 2,000 27,000 31,000 Less: Drawings 6,500) (8,000) 20,500 33,000 Malcol n is surprised to see that he now has an overdraf, in spite of making a profit and brining in additional capital during the year. You are required to assist him by preparing statement of cash flows.Chapter - 12 STATEMENT OF CASH FLOWS AM#I: AM#2: ASSIGNMENT MATERIAL (205) The accounting staff of Star Corporation has assembled the following information for the year ended December 31, 19__ Cash sales Credit sales Collections on accounts recei Cash transferred from the saving account to the general bank account Interest and dividends received Purchase (all on account) Payments on accounts payable to merchandise suppliers Cash payments for operating expenses Interest paid Income taxes paid Loans made to borrowers Collections on loans (excluding receipts of interest) Cash paid to acquire plant assets Book value of plant assets sold Gain on sales of plant assets Additional capital Drawings Cash and cash equivalent, beginning of year Cash and cash equivalents end of year Required: Prepare a statement of cash flows. (Direct method) Rs. 380,000 3,420,000 3,130,000 180,000, 40,000 1,950,000 2,000,000 800,000 95,000 180,000 220,000 145,000 1,640,000 70,000 35,000 1,355,000 180,000 450,000 2 ‘The following data relates to Shahnawaz Sports (Private) Limited for the year ended June 30, 2007 Rs. Inventory 230,000 Prepaid expenses 14,000 Trade debtors 52,000 Cash’ 15,000 ‘Accounts payable 39,000 Income tax payable 5,000 Sales 500,000 ~ Cost of sales 310,000 Operating expenses 80,000 Interest expenses 21,000 Taxation 30,000 Depreciation included in operating expenses 6,000 included in cost of goods sold 6,000 Profit before tax 89,000 Required: What will be the net cash flow from operating activities under: (i) Direct method (ii) Indirect method 2006 Rs. 185,000 16,000 30,000 38,000 44,000 4,000(206) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 12 QUIZ Question Draw up a statement of cash flows for S. Markham for the year ended 30 June 2008 7 S, Markham Profit and Loss Account : For the year ended 30 June 20x 8 ; Rs. Sales 500,000, CGS 60,060) Gross profit 139,940 Operating expenses: Wages & Salaries 49,220 Equipment Running cost 16,040 Motor vehicle expense 8,110 Depreciation-Motor vehicle 3,090 -Equipment 2.195 Reversal of bad debts provision (170) Loss on disposal 560, (79,045) Profit from operations 60,895 Other income: . Interest on Investment 875 Financial charges Interest on loan’ (500) Profit before tax 61,270 Income tax expenditure 14, Profit after tax 46,770 Balance Sheet As at 30 June 2008 2007 2008 Fixed asset Rs, Rs. Rs. Rs. Equipment at cost 31,150 20,100 Depreciation to date (18,395) 12,755. (14.600) 5,500 Motor vehicle at cost. 22,510 22,510 Depreciation to date’ (7,080) 15,430 (10,170) 12,340 28,185 17,840 Investments - 20,000 Current asset Stock 28,970 32,005 Debtors* 16,320 15,050 Accrued Interest 200 350 ‘ Cash, 8,850, 34,340 2.875 55,280 82,525 93,120 Equity Owner's Equity 49,990 68,760 Long Term loan 21,185 10,000Chapter -12 STATEMENT OF CASH FLOWS 207) Current liabiliti Creditors 11,000 14,000 Salaries owing 200 220 Interest owing 150 11,350 140 14,360 82,525 93.120 * Debtors 2007 Rs. 17,000 - Provi Debtors 2008 Rs. 15,560 — Provision Rs. 510 Note: The equipment was sold for Rs. 4,500.Chapter -13 PRACTICE QUESTION SOLUTIONSChapter -13 Question #1: Question # 2: Question # 3: Question # 4: Question #5: PRACTICE QUESTION SOLUTIONS. ‘Transactions: Not Transactions: Assets: Liabilities: In the assets list In the liabilities list: 1 Capital = 38,100 2, Assets = 51,600 3. Liabilit ,600 4. Capital = 104,100 5 Liabilities = 26,000 6. Assets = 159,000 Assets 26,200 (W-1) 26,200 able od a,b.e fh, lk, lmn 64,85 Loan from SAEED Creditors Capital Stock of goods Debtors Motor vehicle Furniture Land = Capital + Liabilities = 23,750+2,450 = 26,200—8SSOOEEEEE—eeeeee @12) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 Working notes (WL) Calculation of total assets: Debtors 4,950 Motor vehicles 5,700 Fixtures 5,500 Stock of goods 8,800 Cash at bank 1,250 Total 26,200 Question # 6: Assets = Capital + Liabilities 15,900 (W-1) = 15,000+ 900 15,900 = 15,900 Working notes (W-1) Calculation of total assets: Office machinery 9,000 Stock of goods 1,550 Debtors 275 Cash at bank 5.075 Total 15,900 Question #7: Assets = Capital + Liabilities 8,800 (W-1) = Capital + 3,400 (W.2) Capital = 8,800 - 3,400 Capital = 5,400 Working notes (W-1) Calculation of total assets: Motor vehicle 2,000 Premises 5,000 Stock of good 1,000 Cash in hand 100 Cash at bank ‘700 Total 8,800Chapter -13 (w22) Calculation of total liabilities: Creditors AZEEZ’s loan Total Question # 8: Assets 13,400 (W-1) Capital Capital (wl) Calculation of total assets: Fixtures Motor vehicle Stock of good Cash in hand Cash at bank Total (W-2) Calculation of total liabilities Creditors SAEED’s loan Total PRACTICE QUESTION SOLUTIONS. = Capital + Liabilities = Capital + 4,400 (W-2) = 13,400-4,400 = 9,000 Working notes 2,000 5,000 3,500 100 2,800 13,400 1,400 3,000(14) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Question # 1: Shall be accounted for: abet Shall not be accounted for: deChapter -13 Question # 1: PRACTICE QUESTION SOLUTIONS. Oar Increase S.No. Account head Decreash | Credit(CR) ~ | Motor lorry Increase DR 8 {Cash Decrease CR 4 LWAHAAB Liability Decrease DR _? [Bank Asset Decrease CR | ABID' Ioan Liability Decrease DR Cash ‘Asset Decrease CR q [Cash Asset Increase DR Motor lorry Asset Decrease CR | Oifice machinery Asset Increase DR ULTRA Lid. Liability | Increase CR 7; [Cash Asset Increase DR GHAZI Asset Decrease CR Bank Asset Increase DR & | SHAMAS Asset Decrease CR h Bank. Asset. Increase 7 DR. | Capital Capital Increase CR | > [Cash Asset Increase, DR ' ALI’s loan Liability Increase CR [LUQMAN Liability Decrease DR Lo? Cash. [Asset Decrease CR Question # 2: [ Income | Expense , | sino. Account head ast | eee || Gennes) Liability Capital _ [AHSAN Liability | Decrease | DR with Rs. 700. Cash Asset_| Decrease | CR with Rs. 700, >| Fixtures ‘Asset_| Increase _| DR with Rs. 200. | Bank Asset_| Decrease | GR with Rs. 200. | Purchases Expense | Increase | DR with Rs. 275. | ARSLAN Liability | Increase | CR withRs.275. a [Cash ‘Agset__| Increase _| DR with Rs. 500. © [Capita Capital | “Increase | CR with Rs. 500._ < (| Lash ‘Asset _| Increase | DR with Rs. 200. WAHEED’s loan Liability | Increase | CR with Rs. 200. ¢ Bank - Asset_| Increase | DRwithRs.50. | "SUNEEL ‘Asset_| Decrease | CR with Rs. 50. ‘ARSLAN Liability | Decrease | DR with Rs. 60. Purchases return Expenses | Decrease | CR with Rs. 60. Premises Asset__| Increase | DR with Rs. 5,000.—<—[ _“__oV"“o"""" 8] (216) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 [ Bank Asset [ Decrease [CR with Rs. 5,000. Question # 3: _ ~ Income | | Expense | increase Debit(DR) | S.No. Account head rae Decrease | || Credit(cr) Capital Motor van ‘Asset _| Increase _| DR with Rs. 500. 2 ‘ASLAM, _ Liability | Increase_| CR with Rs. 500. DANISH’s loan, = Liability | Decrease | DR with Rs.-1,000. can (ecal Asset | Decrease | GR with Rs. 1,000. "| Purchases - Expense | Increase | DR with Rs. 150. S| Bank Asset_| Decrease | CR with Rs. A Agset_| Increase_| DR with Rs So - - Capital_| Increase | CR with Rs. —_ Asset__| Increase | DR with Rs. —| “income | Increase | CR with Rs. 100. ¢ | Sales return Income | Decrease | DR with Rs. 80. ARIF _ Asset _| Decrease | CR with Rs. 80. | Purchases Expense | Increase_| DR with Rs. 220. 8 | KASHIF Liability | Increase | CR with Rs. 220. hp [Drawings Capital | Decrease | DR with Rs. 100. Cash 7 Asset__| Decrease | CR with Rs. 100. ;__ [RASHIE Liability | Decrease | DR with Rs. 190. [Bank 7 Cash | Decrease [GR with Rs. 190. Question # 4: Asset , 5 Date Account head Liability | preremse | Createeh) 2004 Capital a June or [Bank Alset__| Increase | DR with Rs. 5,000. _| I Capital Capital_| Increase | CR with Rs. 5,000.__| Tune 02 | Motor van [Asset | Increase” | DR with Rs. 1,200. Bank ~Asset__| Decrease | CR with Rs. 1,200. June 05 | Office fixtures Asset__| Increase [DR with Rs. 400. _ YOUNG Lid. Liability | Increase | CR with Rs. 400. June og | Motor van Asset_| Increase [DR with Rs. 800.__| SUPER MOTORS Liability | Increase | CR with Rs. 800. pemralccaait Asset_| Increase | DR with Rs. 100 Bank Asset__| Decrease | CR with Rs. 100. June 15. _OMiee furniture | Asset__| Increase | DR with Rs. 60. Cash : ‘Asset_| Decrease | CR with Rs. 60. | june 19 |SUPER MOTORS Liability | Decrease | DR with Rs. 800. | ; | Asset_| Decrease | CR with Rs. 800. peer cert _________| Asset] increase [DR with Rs. 1,000. _| | ANWAR's loan Liability | Increase 000. june 25. | Bank : ‘Asset_| Increase | DR with Rs. 800. L [Cash Asset__| Decrease | CR with Rs. 800.Chapter -13 PRACTICE QUESTION SOLUTIONS. Office fixtures ‘Asset__| Increase _[ DR with Rs. 300. June 30 [Bank Asset__| Decrease | CR with Rs. 300. Question # 5: General journal a Date | Particulars DR cR 2005) Rs. Rs, March 01 | Cash 1,000 Capital | 1,000 | (Business started with cash) _~ | March 02 | Bank . 5,000 | SHAHZAD’s loan | 5,000 | (Loan taken from SHAP7 ‘7 through cheque} March 03 60 60 (Bought machinery with cash) _ March 0S Office ‘equipment 550 SUNDAR Lid 550 | (Bought office equipment from SUNDAR Ltd.) | March 08 | Cash 300 Bank 300 (Cash withdraw from bank) March 15 | SHAHZAD’s loan Say Bank |, oe (Repaid part of SHAHZAD's loan through cheque) March 17 FSUNDAR Lid, 550 Bank aa (Paid SUNDAR Lid. through cheque)_ March 24 | SHAHZADs loan #09) | Cash I (Repaid part of SHAHZAD's loan through cash) | March 31 | Machinery . 500 | | mon ) (Bought machineryggom RAZA on credit) Total 8,860 | 8,860 General ledger Cash Date | Particulars [| R. | Amount | Date [ Particulars, | R. | Amount 2005 Rs 2005 Rs. Mar-01 | Capital | 1,000 | Mar-03 | Machinery 60 Mar-08 | Bank 300 | Mar-24 | SHAHZAD,s lo. 100 Mar-31 | Balance e/d 1,140 1,300 |___1,300° Capital Date [Particulars | 'R. | Amount | Date | Particulars’ [ R. | Amount 2005 Rs. 2005 Rs. Mar-31 | Balance e/d 1,000 PMar-O1 | Cash 1,000 1,000 [1.0007(218) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 _ Bank 2 Date | Particulars | R. | Amount | Date | Particulars | R. | Amount 2005 Rs. | 2005 Rs. Mar-02 | SHAHZAD's 5,000 | Mar-08 | Cash 300 loan Mar-15 | SHAHZAD’s lo. 800 Mar-17 | SUNDAR Lid. = | Mar-31 | Balance c/d 3,000 _ _ _SHAHZAD’s loan jo {Date Particulars Amount | Date Particulars ‘Amount | 2005 | Rs. 2005 Rs. Mar-15 | Ban: 800 | Mar-02 | Bank 5,000 Mar-24 | Cash 100 Mar-31 | Balance e/d 4,100 5,000 4. Machinery [Date [Particulars [R.[ Amount | Date | Particulars ‘Amount 2005 Rs 2005 Rs. Mar-03 | Cash | 60 Mar-31 | RAZA | 500 | Mar-31 | Balance e/d 560, 560 _ Office equipment [Date [Particulars [R [Amount | Date [Particulars ‘Amount [2005 Rs. 2005 Rs. Mar-05 | SUNDAR Lid. 550 | Mar-31 | Balance c/d 550 | | 550) 350 | SUNDAR Ltd. Date [Particulars | R_[ Amount | Date | Particulars ‘Amount 2005 Rs. 2005 Rs. Mar-I7 | Bank 550 | Mar-05 | Office equipment $50 550 350 (Date TParticutars [R. [Amount |" Date [Particulars ‘Amoun [200s Rs. 2005 Rs. | Mar-31 | Balance e/d 500 | Mar-31 | Machinery 500 300 500Chapter -13 PRACTICE QUESTION SOLUTIONS ‘Trial balance ‘As on March 31, 2008. _ Head of account Cash Capital ~ Bank SHAHZAD*s loan Machinery Office equipment SUNDAR Ltd. RAZA Question # 6: Books of ILYAS General journal Date Particulars LF] DR cR 72008 Rs. Rs. July 01 | Bank 10,000 Capital 10,000 (Started business with bank account) July 02 [Cash 400 COOPER’s loan 400 (Loan acquired from COOPER) : July 03 | Purchases 4,440 JONES 840 CHARLES 3,600 (Goods purchased on credit from JONES and CHARLES) July 04 [Cash 200 | Sales 200 (Goods sold for cash) July 06 [Bank ~ ~ 250 Cash | 250, (Cash paid into bank) | July 08. |MooDY 180 Sales ae (Goods sold ty MOODY on credit) July 10. [NEWMAN 220 | Sales 220 (Goods sold to NEWMAN on credit) July 1! | Purchases 370 JONES ay (Goods purchased on credit from JONES) July 2 J Sales return — od MOODY | 40 (Goods returned by MOODY) | July 14 FMORGAN 190 | PEAT Se Sales alle (Goods sold on credit to MORGAN and PEAT)(220) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 [ July 15, [JONES 140 Purchases return 140 (Goods retumed to JONES) July 17 | Motor van 2,600 MANCHESTER MOTORS 2,600 | (Motor van purchased on credit from | MANCHESTER MOTORS) | | July 18 | Office furniture 600 | FASTER Ltd. 600) (Furniture purchased from FASTER Lid.) July 19 [| CHARLES: nt) | . Purchases return 10 (Goods returned to CHARLES) July 20 | Purchases 220 Cash 220 (Goods purchased for cash) _ July 24 F Cash 70 Sales ue (Goods sold for cash) July 25 TJONES 1,070 |. Bank 1,070 (JONES's acccunt paid through cheque) July 26 [Sales return ® MORGAN SD (Goods retumed by MORGAN July27 FEASTER LA a) Office furniture tt ice fun y ; July 2g. {Oe Furniture retumed by FASTER Li. 300 Capital Soy (Further cash introduced by ILYAS} July29_ | MANCHESTER MOTORS eae re 2,600 (Paid MANCHESTER MOTORS through cheque) Suly 31. Office farniore ce Cash S (Office furniture purchased for cash) Total 24810 | 24,810 Question #7: : Books of SHAHBAZ - General journ: {Date Particulars LF [DR cR 2007 Rs. Rs. October 01} Bank 50,000 Capital 50,000 Started business with bank account | October 02. | Purchases | 22,500 SALMAN | 22,500 (Goods purchased from SALMAN on credit | October 03 | Purchases 6,250 HASEEB 6,250 (Goods purchased from HASEEB on crest)Chapter - 13 PRACTICE QUESTION SOLUTIONS ‘October 06 | Cash 7300 Sales 4,500 | (Goods sold for cash) October 07. [SALMAN 1,000 Purchases return 1,000 | (Goods returned to SALMAN) October 09 [Purchases . 4,750 HASEEB 4,750 Goods purchased from HASEEB on credit) October 11 [WASEEM 9,750 Sales 9,750 | (Goods sold 10 WASEEM on credit) October 13 Cash 5,250 Sales 5,250 ‘Goods sold for cash) October 17 [Bank 7,500 Cash 7,500 Cash deposited into bank) October 20. | Machinery 13,750 Bank 13,750 (Machinery purchased through cheque) October 23. F MUNEEB * | 55,000 Sales 55,000 (Goods sold to MUNEEB on credit Octoberas Perens seen) 3,500 WASEEM zo) (Goods returned to us by WASEEM) ctober 27, SGvedssetummed to us by WASEEM) 250 MUNEEB cae Ge B) Cetober 29 | Soadstetumed to us by MUNEEB) 750 Purchases return co ctober 39 | (G0eds retumed to HASEEB) a1s00 SALMAN 5 “Bank | 21,500 eter 31 |{Psid SALMAN through chegue eas fachinery , 6750 LUQMAN s (Machinery purchased from LUQMAN) Total 213,000 | 213,000 Question # 8: x Books of AZHAR General journal Date Particulars LF [DR cR 2009 a; Rs. RS: June 01 | Cash 135,000 Capital 135,000 (Started business with Cash) June 02 | Purchases 26,640 AHMAD 26,640 (Goods purchased from AHMAD on credit) (221)(222) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 Tune 03 | Rent 2,520 ] Cash 2,520 Rent paid in cash) June 04 ne 90,000 Cash 90,000 (Cash deposited into the bank) June 06 | ELAHI 4,860 1 Sales 4,860 | (Goods sold to ELAHI on credit) | June 08. | Stationery 1,350 Bank 1,350 (Bought stationery through cheque} June 10 [Cash 4410 Sales 4410 | (Goods sold for cash) _ June 13. AHMAD 1,530 Purchases return | } 1530 (Goods returned to AHMAD) | i June 16 [MASOOD 2,610 | | Sales 2.610) (Goods sold to MASOOD on credit) June 19° FRepair 1,620 Cash 1,620 epair changes paid in cash) June 21 } epsicchanges = 1,260 ELAHI 1,260 June 26 [Goods returned ty BLAH alu | . : 25,110 Bank | 5 June 27 | {Paid to AHMAD through cheque ne es 11,250 Cash 4 | (Goods Purchased for cash June 28 Motor vehicle ~ peeen) Bank } > 229 | Motor vehicle purchased through cheque) | June 29 Motor expenses a | een Cash | . June 30. [Motor expenses paid in cash) | Iinrera Fixtures " Ie | OSAMA b (Bought fixtures from OSAMA on credit) Total 355,860 | 355,860 | General ledger _ Cash Date Particulars R | DR CR Balance | 2009 Rs. RS. Rs. Jun-O1 | Capital 135,000 DR_ 135,000 Jun-03_| Rent 2,520] DR 132,480 Jun-04 | Bank | 90,000 | DR 42,480 Jun-10 | Sales 4,10 DR 46,890 Junel9 | Repair . 1,620) DR 45,270 Jun-27 | Purchases 11,250] DR 34,020 Jun-29 | Motor expenses 1,350 | DR_32,670PRACTICE QUESTION SOLUTIONS Capital Particulars R. cR 7 Rs. Cash 135,000 | CR_135,000 - Purchases _ Date __ Particulars R. | DR CR | Balance _| 2009 Rs. Rs. Rs. Jun-02 | AHMAD" 26,640 DR 26,640 | Jun-27_| Cash 11,250, DR_37,890 | AHMAD Date |_ ‘Particulars R.| DR CR Balance 2009 Rs. Rs. Rs. Jun-02 | Purchases 26,640 | CR 26,640 Jun-13 | Purchases return 1,530 CR 25,110 Jun-26__| Bank 25,110 Nil Rent Date Particulars R. DR cR Balance 2009 Rs. | | Rs. Rs, Jun-03_| Cash 2,520 DR___2,520 Date Particulars DR cR Balance | 2009 Rs. Rs. Rs, | Jun-04 | Cash 90,000 DR 90,000 Jun-08 | Stationery 1,350 | DR 88,650 Jun-26 | AHMAD 25,110 | DR 63,540 j~ Jun-28 | Motor vehicle 35,550 | DR__27,990 ELAHI Date R. DR CR Balance 2009 Rs, Rs, Rs. Jun-06 | Sales 4,860 DR 4,860 Jun-21_| Sales return 1,260 | DR__3,600 | - Sal — _ Date Particulars DR CR Balance 2009 Rs. Rs. Rs, Jun-06 | ELAHI 4,860|CR 4,860 Jun-10 | Cash 4,410}CR 9,270 Jun-16_| MASOOD. 1 2,610 | CR__ 11,880 _ Stationery . Date | R. DR CR Balance + 2009 | Rs, Rs. Rs. Jun-08_| Bank 1,350 __ | DR __ 1,350 (223)(224) ILMI FUNDAMENTALS OF ACCOUNTING Purchases return Date | Particulars R. | DR CR Balance 2009 Rs, Rs. Jun-13_| AHMAD 1,530 MASOOD. —— Date | Particulars R | DR CR Balance 2009 Rs. RS. Rs Jun-16_| Sales 2,610 DR__2.610 Repair Date Particulars RK] DR CR Balance 2009 Rs Rs Rs Jun-19 | Cash 1,620 DR__1,620 Sales return Date Particulars R. [DR CR Balance 2009 Rs. Rs, Rs. | Jun-21_| ELAHI 1,260 DR_1.260 | Motor vehicle Date Particulars R. ck Balance 2009 Rs. Rs | Jun-28_| Bank 38530 DR_35,550 | _ Motor expenses Date | Particulars R. [DR CR Balance 2009 Rs. Rs, Rs. Jun-29 | Cash 1,350 DR__1,350 Fixtures Date Particulars R | DR CR Balance 2009 Rs, Rs. Rs Jun-30_| OSAMA 10,800 DR_10,800 OSAMA Date Particulars R. | DR CR Balance 2009 Rs, Rs. Rs, Jun-30_| Fixtures 10,800 | CR_ 10,800Chapter -13 PRACTICE QUESTION SOLUTIONS Trial balance As on June 30, 2009. S.No._| Head of account LF DR | CR Rs. Rs. 1 | Cash 32,670 2 | Capital 135,000 3 | Purchases 37,890 4 | AHMAD 5 | Rent 2,520 6 | Bank 27,990 7 | ELAHI 3,600 8 | Sales 11,880 9 | Stationery 1,350 10 | Purchases return 1,530 lL | MAsooD 2,610 12 | Repair 1,620 13. | Sales return 1,260 14 | Motor vehicle 35,550 15 | Motor expenses 1,350 16 | Fixtures 10,800 17 | OSAMA 10,800 u 1 . = = = Question #9: - General journal | Date _ Particulars — LF | DR cR_ | 2006 Rs. Rs. May 01 | Bank 2,000 Capital 2,000 | (Business started with bank account) May 02. | Purchases 175) MOHSIN 175 | (Goods purchased from MOHSIN on credit) May 03. | Fixtures & fittings 150 Bank 150 (Fixtures & fittings purchased through cheque) May 0S | Cash 275 Sales 275 (Goods sold for cash) May 06 | Purchases _ 14 AZHAR 14 ‘Goods purchased from AZHAR on credit) | May 10 | Rent 15 Cash 15 (Rent paid in cash) May 12 [Stationery - 27 Cash | n (Stationery purchased with cash} May 18 | MOHSIN’ a 2 Purchases return 2 (Goods return to MOHSIN) | (225)(226) ILML FUNDAMENTALS OF ACCOUNTING. Chapter - 13 / May 21 | Bank 5 Rent Income 5 | (Rent received through cheque) May 23. | HAROON 7 Sales 7 (Goods sold to HAROON on credit) | May 24 | Motor van 300 | Bank 300 (Motor van bought through cheque) May 30 | Wages U7 Cash Wa (Wages paid in cash May 31 | Drawings “ Cash a | (Cash withdraw by owner for himself) Total 3321 [3,321] General ledger - Bank _ Date Particulars R [DR CR 2006 | Rs RS. May-01 | Capital | 2,000 May-03 | Fixtures & fittings 150| DR 1,850 May-21 | Rent income 5 DR 1,855 | May-24 | Motor van | 300 | bR__1,555 | Capital ~ Date Particulars R [DR cR 2006 Rs. RS. May-01_| Bank | 2,000 __ _ Purchases {Date Particulars R [DR CR | 2006 Rs. Rs. | May-02 | MOHSIN 175 | May-06 | AZHAR - 14 Date Particulars R [DR CR Balance 2006 Rs. Rs. Rs. May-07 | Purchases | 175]CR 175 May-18 | Purchases return l 2 CR 153 Fixtures & fittin Date Particulars R. [DR cR Balance 2006 Rs. Rs. Rs. May-03_| Bank_ | 150 DR 150 7 _ Cash 7 { at __ Particulars R [DR cR Balance I Bs. RS. Rs. May-08 | Sales 218 DR 275 May-10_| Rent - 15 | DR 260,Chapter -13 PRACTICE QUESTION SOLUTIONS May-12 | Stationery 277DR 233 May-30 | Wages 7]}DR 16 | May-31_| Drawings | 44{DR_ 72 | Sales Particulars R | DR CR | Balance Rs. Rs. Rs. Cash 275|CR 275 HAROON T7\CR__352 Date | __—Particulars DR | CR | Balance | 2006 Rs. Rs. Rs. May-06_| Purchases u4|cr__4 Rent Particulars R.[_ DR CR Balance Rs. Rs, Rs. Cash _ 1S DR 15 _ Stationery Particulars R | DR CR Balance Rs. Rs. Rs. Cash _ 27 DR 27 Purchases return Date Particulars R.| DR cR Balance 2006 Rs Rs Rs. | May-18_| MOHSIN 22] cr 2 Rent Income Particulars R. [DR CR Rs. a Rs. | Bank 5 — HAROON, Date Particulars R [DR CR 2006 Rs, Rs. May-23_| Sales 7 — Motor Van _ Date Particulars R | DR CR Balance 2006 Rs. Rs, Rs May-24_| Bank 300 DR___300 _ ___ Wages [Date _ Particulars R [DR cR Balance 2006 Rs Rs, Rs. | |_May-30_| Cash 7 __{pr__ui7} (227)(228) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 = Drawings Date Particulars R [DR 2006 Rs. May-31_| Cash 44 Trial balance - As on May 31, 2006 S.No. ___ Head of account | £F Tr CR Rs. Rs. 1 | Bank 1,355 2 | Capital 2,000 3 | Purchases 289 4 | MOHSIN 153 5 tures & fittings 150 6 | Cash R 7 | Sales 352 8 | AZHAR 9 | Rent | 15 10 | Stationery | 7 | 11 | Purchases return 2] 12 | Rent income 5 13 | HAROON 7 14 | Motor van 300 15 | Wages 117 16 | Drawings 44 2,646 | 2,646 Question # 10: Books of TALHA - General journal _ Date Particulars LF DR CR} 2007 | Rs Rs Mar 01 | Cash 1,500 Capital 1,500 | (Business started with cash) Mar 02 | Purchases 296. HASSAN 296 Goods purchased from HASSAN on credit) Mar 03. | Rent 28 Cash 28 | (Rent paid in cash) Mar 04 | Bank 1,000 Cash 1,000 + | (Cash deposited into bank) Mar 05 [EHSAN 34 Sales 54 (Goods sold to EHSAN on credit) Mar 07 | Stationery 15 Bank 15 (Stationery purchased through cash)Chapter 13 PRACTICE QUESTION SOLUTIONS. (229) [Mar 11 | Cash 49 Sales 49 | (Goods sold ___| Mar 14. [HASSAN 7 Purchases return ” (Goods return to HASSAN) __ | Mar 17 | MUSHARIF 29 Sales 29 | (Goods sold to MUSHARIF on eredit Mar 20. | Repair 18 18 {Re aoe Mar 22 | Sales return, 14) EHSAN “4 (Goods returned by EHSAN) __| Mar25 [Cash — 1 27 Discount allowed 13 EHSAN 40 (Received cash from AHSAN and give discount | Mar 27 HASSAN 279 Cash 270 Discount received 9 (Cash paid to HASS. received di vino {Cae |AN and discount] a | Cash 125 | (Goods purchased for cash) Mar 29 F Motor van 395 Bank oo) (Motor Van bought through cheque) Mar 30 F Motor expenses * Is Cash ® ae Hiofetseeetdar a WASEEM 120 | (Bought fixtures from WASEEM on credit) | Total 3,994 | 3,994 General ledger Cash . Date | Particulars | R.| Amount | Date | Particulars | R. | Amount 2007 Rs. | 2007 = Rs Mar-01 | Capital 1,500 | Mar-03 | Rent 28 Mar-11 | Sales 49 | Mar-04 | Bank 1,000 Mar-25 | EHSAN 27 | Mar-20 | Repair 18 Mar-27 | HASSAN 270 Mar-28 | Purchases 125 Mar-30 | Motor expenses 15 = | Mar-31 | Balance c/d [120 1,576 1,576(230) ILMI FUNDAMENTALS OF ACCOUNTING, Chapter - 13 : ____ Capital Date | Particulars | R. [ Amount | Date | Particulars — ‘Amount | 2007 Rs. Rs, Mar-31 | Balance e/d 1,500 | Mar-01 | Cash 1,500 1,500 1,500 Purchases Date | Particulars | R.| Amount | Date | Particulars ‘Amount 2007 Rs. | 2007 Rs. Mar-02 | HASSAN 296 Mar-28 | Cash Balance e/d 421 21 all il _ __HASSAN Date | Particulars | R. | Amount | Date Particulars ‘Amount | 2007 Rs. 2007 Rs. Mar-14 | Purchases return 17 | Mar-02 | Purchases 296 | Mar-27 | Cash 270 | Mar-27 | Discount 9 received 296 296 Rent Date [Particulars | R. | Amount | Date [Particulars Amount 2007 Rs. | 2007 Rs. Mar-03 | Cash 28 | Mar-31 | Balance c/d 28 28 28 —__ mk Date | Date | Particulars ‘Amount 2007 . | 2007 Rs, | Mar-04 | Cash 1,000 | Mar-07 | Stationery 15 Mar-29 | Motor van 395 Mar-31 | Balance cfd 590 [—t.000] EHSAN i Date | Particulars Amount | Date [Particulars | R. | Amount 2007 Rs 2007 [Rs Mar-05 | Sales 54 | Mar-22 | Sales return 4 Mar-25 | Cash | 7 | Mar-25 | Discount allowed 13 | 34 54]Chapter -13 PRACTICE QUESTION SOLUTIONS 31) : Sales — Date | Particulars | R. | Amount | Date | Particulars “Amount | | 2007 Rs, 2007 Mar-05 | EHSAN Mar-I1 | Cash Mar-31 | Balance e/d _132 | Mar-17 | MUSHARIF pa Stationery Date R. | Amount | Date Particulars . | Amount | 2007 Rs, 2007 Rs. Mar-07 | Bank 15.| Mar-31 | Balance e/d 15 15] 15) Purchases return Date Particulars | R. | Amount | Date Particulars | R. | Amount | 2007 Rs. 2007 Rs. | Mar-31_ | Balance o/d | 17| Mar-14 | HASSA | 7 7 | = _ 7 MUSHARIF Date | Particulars ‘Amount | Date | Particulars | R. | Amount 2007 Rs. | 2007 Rs. Mar-17 | Sales 29 | Mar-31 | Balance c/d 29 29 29 Repai Date | Particulars | R.| Amount | Date | Particulars | R. | Amount |" 2007 Rs. | 2007 Rs. Mar-20 | Cash 18 | Mar-31 | Balance e/d 18 18 18 Sales return Date | Particulars | R. | Amount | Date | Particulars 2007 Rs. | 2007 Mar-22 | EHSAN | 14 | Mar-31 | Balance o/d 14 - Discount allowed _ {Date | Particulars [-R. | Amount | Date | Particulars Amount 2007 Rs 2007 Rs. Mar-25 | EHSAN |____13 | Mai-31 | Balance e/d 13 3 [ B _ received - Particulars [| R. Date | Particulars | R. | Amount 2007 Rs. Mar-31 | Balance c/d Mar-27 | HASSAN, 9 9(232) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Motor van Date [Particulars | R. | Amount | Date | Particulars 2007 Rs, 2007 Mar-29 | Bank |___395 | Mar-31 | Balance e/d 395 = Motor expenses : Date Particulars | R. | Amount | Date Particulars | R. | Amount 2007 Rs, 2007 | Rs. Mar-30 | Cash 15 | Mar-31 | Balance e/d Is 15 _ Fixtures _ Date | Particulars | R.[ Amount | Date | Particulars — 2007 | Rs. 2007 Mar-31 | WASEEM 120 | Mar-31 | Balance e/d 120 ee WASEEM Date Particulars R. | Amount | Date_ Particulars ‘Amount | 2007 Rs. | 2007 Rs. | Mar-31 | Balance e/d 120 | Mar-31 | Fixtures 120 ‘Trial balance As on Mareh 31, 2007 S.No. Head of account LF] DR | cR Rs. Rs. 1 | Cash 120 2 | Capital 1,500 3 | Purchases 421 4 | HASSAN 5 | Rent 28 6 | Bank 590 7 | EHSAN 8 | Sales 132 9 | Stationery Is 10 | Purchases return "7 11 | MUSHARIF 29 12._| Repair 18 13. | Sales return \4 14 | Discount allowed 13 15 | Discount received 9 16 | Motor van 395 17 | Motor expenses 15 18 | Fixtures 120 19 | WASEEM 120 1,778 | _1,778Chapter - 13 Question # 1: ‘Trading and profit & loss account For the year ended March 31, 2004. T ‘Amount | Parti [Amount as Rs | Opening stock | 30,000 | Sates (W-2) 176,000 Purchases (W-1) 59,250 | Closing stock 35,000 | Wages 10,000 | Carriage in | 750 Gross profit e/d | Discount allowed Gross profit b/d Bank charges | Discount received | Salaries 6,800 Carriage out 675, | Rent, rates & taxes 10,000 Advertisements 2,000 Net profit (transferred to capital account) __91,900 [111,800 [117,800 | QAMAR Balance sheet - Z ‘As on March 31, 2004, | _ aw avant Assets___|] Amount Rs. Rs] Capital 50,000 Plant & machinery 80,000 | Add: Net profit 91,900 } 141,900 | Stock 35,000 | | | Sundry debtors 45,000 Creditors | 25,000 | Cash at bank | 6.000 Cash in hand a) [166,900 | Working notes (Wel) Calculation of net purchases: Purchases 60,000 Less: Return outwards (750) Net purchases 394250 (W-2) Calculation of net sales: Sales 17,000 Less: Return inwards 1,000)234) ILMI FUNDAMENTALS OF ACCOUNTING Chapter 13 176,000 Question # 2: QAISAR SHARIF Trading and profit & loss account For the year ended December 31, 2005 __ Particulars _| Amount Particulars Amount Rs. Rs. Opening stock 27,000 | Sales - 208,530 Purchases 81,000 | Closing stock 30,000 Wages 12,960 | Carriage in 675 Gross profit sid 116,895, 238,530 238,530 Salari 9,900 | Gross profit b/d 116,895 Postage & stationery 675 Carriage out 900 Bad debts 855 Official general charges 1,350 Net profit (transferred to capital = account) 103,215 | 116,895 116,895 QAISAR SHARIF Balance sheet As on December 31, 2005 L Liabilities Amount Assets Amount Rs. Rs, Capital 81,000 Freehold premises 45,000 Add: Net profit 103,215 184,215 | Plant & machinery 67,500 Stock 30,000 Creditors 9,000 | Debtors 45,540 | Bills payable 4,815 | Bills receivable 4,500 | Cash at bank 4,770 _ Cash in hand 720 198,030 198,030 Question #3: ‘Trading and profit & loss account For the year ended December 31,2006 Particulars ‘Amount Particulars ‘Amount Rs. Rs. Opening stock 50,600 | Sales (W-2) 893,200 Purchases (W-1) 473,000 | Closing stock 41.800 Wages 47,850 | Carriage inward 43.010 | Gross profit c/d | 320,540 ne 935,000 935,000Chapter - 13 PRACTICE QUESTION SOLUTIONS 235) {Salaries 72,600 | Gross profit b/d 320,540 | Advertising expenses 11,220 | Discount received | 2420 Rates & taxes 5,830 Office electricity expenses 10,340 ‘Telephone charges 4,840 Printing & stationery 12,320 Postage & stamps 1,199 A Insurance premium 3,300 5 Carriage outwards 13,200 Bad debts 880 Net profit (transferred to capital account) 187, [322,960 Balance sheet As on December 31, 2006 Liabi ‘Amount ‘Assets ‘Amount Rs. Rs. Capital 524,590 Land & building 369,600 ‘Add: Net profit 187,231 | 711,821 | Office equipment 219,670 a Furniture 220,000 Creditors 44,000 | Stock | 41,800 Bank loan 165,000 | Stock of stationery 1,320 Bills payable 11,000 | Debtors 49,500 Bills receivable 9,900 : Cash at bank 19,800 Petty cash 231 [931,821 [937,821 Working notes (wl) Calculation of net purchases: \ Purchases 486,200 Less: Purchases return 13,200) ‘Net purchases 473,01 Question # 4: JAHANZAIB ‘Trading and profit & loss account For the year ended June 30, 2007 a Particulars ‘Amount Particulars {Amount Rs. Rs. Opening stock 9,600 | Sales (W-2) 94,140 Purchases (W-1) 41,600 | Closing stock 10,400 Wages 30,000 Gross profit e/d 23,340 104,540 104,540(236) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 Salaries 2,800 | Gross profit bid 23,340 Rent | 1,200 | Discount 740 Office lighting & heating 160 Insurance 1,260 General expenses 200 Bad debts 500 Discount 1,300 Net profit (transferred to capital account) JAHANZAIB Balance Sheet _ As on June 30, 2007 Liabilities Amount Assets Rs. Rs, Capital 8,500 Plant & machinery 19000 ‘Add: Net profit 16,660 Motor van 2.400 25,160 Office furniture & fittings 520 | Less: Drawings (1.400) | 23,760 | Stock 10,400 | Debtors 9,140 Sundry creditors 10.400 | Bills receivable 1,440 Bills payable 1,120 | Cash at bank 1,300 |__| Cash in hand 80 35,280 35,280 Working notes D) \ sJeulation of net purchases: Purchases Less: Return outwards Net purchases 2) (ulation of net sales: Sales Less: Return inward Net sales. 42,700 1,100) 41,600 96,000PRACTICE QUESTION SOLUTIONS. ILIATIC (237) Question # 1: Cash book (Bank column only) [Date | 2005 Particulars R. | Bank | Date Particulars Rs. | 2005 Balance b/d (a) | 25.450 Bill paid Dividend (ad) | 400 Bank charges Interest (| 300 Dishonoured cheque Balance undercast | (g) | _300 Balance e/d | Question # 2: Bank Reconciliation Statement For the period ended December 31, 2005 Adjusted balance as per cash book Less: Un-credited cheques (b) ‘Add: Un-presented cheques (c) Balance as per bank statement Rs, Dr. 24,180 Cr. (500) Dr. __500 cr 180 Cash Book (Bank column only) {Date Particulars LR. | Bank | Date Particulars [RT Bank | Rs. | Rs. Deposit not record | (b) | 700 Balance b/d (a) | 16,200 Casted short () | 100 Bank charges @ 4 Direct collection (© | 3,500 Dishonoured cheque | (e)| 530 Bank charges @) 25 Bill dishonoured (hy | 8,000 Balance e/d 20,405 | | Bank Recon For the period ended... Adjusted balance as per cash book Add: Un-credited cheques (i) Less: Un-presented cheques (j) Balance as per bank statement \n Statement Cr. Cr. Dr. Dr.(238) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Question # 3: - Cash Book (Bank column only) Date Particulars R. | Bank | Date Particulars | R. | Bank | Rs. Rs. Balance b/d (bal) 16,980 Casted short (@) 200 | Cheque deposited | (b) | 500 Insurance premium | (e) | 600 Bank charges @ 20 ‘Cheque entered twice | (h) | 1,000 Bill dishonoured () | 5,000 % Balance e/d 17,500 [ Bank Reconciliation Statement for the period ended. Balance as per bank statement (a) Add: Un-credited cheques (c) Less: Un-presented cheques (g) Adjusted balance as per cash book 10,000 1,200 (300)Chapter -13 PRACTICE QUESTION SOLUTIONS (239) PROVISIO! DEPRECIATI Question # 1: : Debtors, eee . Date Ref. | Amount | Date _ Particulars Ref. | | | 2000 Rs. 2000 | Dee-31 100,000 | Dec-31 | Bank 60,000 Dee-31 | Discount allowed 10,000 Dec-31_ | Return inwards 6,000 Dec-31 | Bad debis 4,000 _ Dec-31 | Balance e/d |__ 20,000 | [100,000 | 100,000 2001 2001 | | Jan-01 | Balance b/d 20,000 | Dec-31 | Bank 100,000 Dec-31 | Sales | 140,000 | Dec-31 |} Discount allowed 14,000 | Dec-31 | Return inwards 4,000 | | Dec-31_ | Provision for B.D 12,000 | Dec-31 | Balance c/d 30,000 160,000 160,000 2002 | 2002 Jan-01 | Balance b/d 30,000 | Dec-31 | Bank 100,000 Dec-31 | Sales 200,000 | Dec-31 | Discount allowed 12,000 | Dec-31 | Retum inwards 46.000 Provision for B.D 2,000 | Balance cid 70,000 230,000 230,000 2 Provision for bad debts Date __Particulars | Ref. | Amount | Date Particulars | Ref. | Amount | 2000 | Rs. 2000 - Dec-31 | Balance e/d 2,000 | Dec-31 | Bad debts 000 | 2001 Debtors Jan-01 | Balance b/d 2,000 | Balance e/d Dec-31 | Bad debts 13,000 15,000 2002 2002 15.000. Dec-31 | Debtors 2,000 | Jan-01 | Balance b/d 3,000 Dec-31 | Balance b/d 7,000 | Dec-31 | Bad debts ane | 9,000(240) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 Bad debts Date Particulars | Ref. | Amount | Date Particulars 2000 Rs, 2000 Dec-31 | Debtors 4,000 | Dec-31 | Profit & loss Dee-31_| Provision for B.D 2,000 6,000 2001 2001 Dee-31_| Provision for B.D 13,000 | Dec-31 | Profit & loss | 2002 | — r 2002 | Dec-31_| Provision for B.D 6,000 | Dec-31 | Profit & loss | 6,000 Question # 2: _ Debtors | — Date Particulars _ Ref. | Amount | Date Particulars Ref. | Amount 2003, Rs. 2003 Rs. Jan-01 | Balance e/d 20,000 | Dec-31_| Bank 180,000 Dee-31 | Sales 200,000 | Dec-31 | Discountallowed | 800 | Dee-31 | Return inwards | 2,000 Dec-31 | Bad debts | 1,000 | Dec-31 | Balance e/d 36.2 220,000 2008 | 2004 Jan-01 | Balance b/d 36,200 | Dec-31 | Bank 190,000 Dec-31 | Sales 180,000 | Dee-31 | Discount allowed 1,000 Dec-31_ | Return inwards 3,600 — Dec-31_| Provision for B.D 3.000 | Dec-31 | Creditors 6,000 [ Dee-31 | Balance e/d 12,600 | 216,200 | 16,200 | . Provision for bad debts “Date jeulars Ref. | Amount | Date Particulars Ref. 2003 Rs. | 2003 Dec-31 | Debtors 1,000 | Jan-01 | Balance b/d Dec-31 | Balance e/d |__ 2.190] Dec-31 | Bad debts 3,190) [3.190 2004 2004 aan Debtors 3,000 | Jan-01 | Balance b/d 2,190 Provision for B.D 1,560 | Dec-31 | Bad debts recovered 3.000 Balance e/d 630 : 5,190 190 | teChapter -13 Question # 3: PRACTICE QUESTION SOLUTIONS (24) _Bad debts D Date | | 2001 2001 Decl Dec-31 Provision for bad debts Amount | Date | Rs. | 2001 Dec-31 | Debtors 3,400 | Jan-O1 Dee-31 | Balance c/d 5,400 | Dec-31 | Bad debts recovered | Dec-31 8,800 Question # Bad debts ~ | Date Amount | Date Ref. 2002 2002 | Dee-31 | Provision for B.D Dec-31 Provision for bad debts |__Date Amount | Date Ref. | Amount 2002 Rs, 2002 Rs. Dec-31 3,600 | Jan-O1 3.000 Dec-31 2,000 | Dec-31 L 00 I | 2003 2003 Dec-31 600 | Jan-01 2,000 Dec-31 800 Dee-31 600 2,000 Discount allowed Provision for discou. ‘Amount [Date Rs, 2002 960 | Dec-31 960 | t | 2003 | 132] Dee-31 Provision for discou.(242) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 Provision for discount on debtors Date |__ Particulars | Ref. | Amount | Date Particulars Ref. 2002 Rs 2002 Dec-31 | Debtors 1,200 | Jan-01 | Balance b/d Dec-31 | Balance o/d 760 | Dec-31 | Discount allowed | 1,960 2003, 2003 Debtors 400 | Jan-01 | Balance b/d Discount allowed 132 Balance c/d 228 760 Question # Outstanding balance of debtors Provision to be recognized Balance as at December 31, 2007 7,000,000 = Mr. A’s outstanding balance / Bad debts amount 800,000) (800,000 x 0.75) 600,000 Remaining debtors’ / Provision on remaining balance 6.200,000 (6,200,000 x 5%) 310,000 Provision to be recognized 210,000 Question # 6: Machinery Rs. 01.01.85 Bank A/c. 31.12.85 Balance e/d 640 640 01.01.86 Balance b/d 01.10.86 Bank A/e. 31.12.86 Balance e/d 1.360 1.360 Fixtures Rs. Rs, 01.01.85 Bank 100 01.07.85 Bank 31.12.85 Balance e/d 300 300 300 01.01.86 Balance b/d 300 01.12.86 Bank 5031.12.86 Balance e/d 350 350 350 Provision for depreciation - Machinery Rs. Rs, 31.12.85 Balance c/d 80 31.12.85 Depreciation 80, 80 80 01.01.86 Balance b/d 80 31.12.86 Balance e/d 240 31.12.86 Depreciation 160 240 240Chapter -13 PRACTICE QUESTION SQLUTIONS (243) Provision for depreciation - Fixtures Rs. 31.12.85 Balance c/d 30 © 31.12.85 Depreciation 30 01.01.86 Balance b/d 30 31.12.86 Balance e/d 62 31.12.86 Depreciation 32 2 @ . Fixed assets As on December 31, 1985, Rs, Assets at cost less accumulated depreciation (940 ~ 110) 830 Fixed Assets as on December 31, 1986 : Rs. Assets at cost less accumulated depreciation (1,710 ~ 302) 1,408 Question # 6: _ Mine Date Particulars “Ref. | Amount | Date Particulars Ref. | Amount 1993 Rs. | 1993 Rs. Jul-30- | Bank 500,000 | Dec-31 | Depreciation (W-1) 25,000 Dec-31 | Balance c/d 475,000 500,000 | 1994 1994 | Jan-01 | Balance bid 475,000 | Dec-31 | Depreciation (W-1) Dec-31 | Balance e/d 475,000 1995 1995 Jan-01 | Balance b/d 375,000 | Dec-31 | Depreciation (W-1) 80,000 Dec-31 | Balance c/d 10 375,000 375,000 1996 1996 | Jan-O1 | Balance b/d 295,000 | Dec-31_ | Depreciation (W-1) 105,000 | | Dec-31 | Balance c/d 190,000 | | 225000) 7 Working notes (W-l) Calculation of depreciation: Year Tonnes Rate Depreciation 1993 5,000 (W-2)S/ton (3,000 x 5) 25,000 1994 20,000 (W-2) 5/ton (20,000 x 5) 100,000 1995 16,000 (W-2) 5 /ton (16,000 x 5) 80,000(244) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 1996 21,000 (W-2)5/1on (21,000 x 5) 105,000 (W-2) Calculation of depreciation rate per ton: ae _ 500,000 100,000Chapter -13 PRACTICE QUESTION SOLUTIONS (245) Question # 1: Mr. ZAID ‘Trading and profit & loss account For the year ended December 31,2002 0 i Particulars | Amount, Particulars, | Amount - ~ Rs. Rs. Opening stock 9,600 | Sales (W~ 94.140 Purchases (W-1) 37,600 | Closing stock 10,400 Wages 30,000 | | Factory lighting (W-3) 0 | Gross profit e/d 27,120 | 104,540 Salaries 2,800 | Gross profit b/d | Rent 1,200 | Discount Insurance 1,260 General expenses 200 Discount 1,300 | Bad debts 500 Provision for bad debts (W-8) 240 | | Provision for discount (W-9) 168 Depreciation (W-4) | 26 | | Net profit (transferred to capital account) 20,166 | 27,860 Mr. ZAID Balance sheet a As on December 31, 2002 Liabilities Amount _Ass [Amount Rs. Rs. | Capital 8,000 Plant & machinery (W-5) | 14,000 ‘Add: Net profit 1.166 Motor van | 2,400 28.166 | Office furniture (W-6) 494 Less: Drawings 1.400) Stock : 10,400 Debtors (W-7) + 8,232 Creditors Bills receivable 1,440 Bills payable Cash at bank 1,300 Outstanding factory lighting Cash in hand | 80 | 38,346 Working notes (wel) Calculation of net purchases: Purchases 42,700 Less: Returns (1,100) Less: Machiner (4,000:(246) ILMI FUNDAMENTALS OF ACCOUNTING. 32,600 (w22) Calculation of net sales: Sales 96,000 Less: Returns 1,860) 94,140 (wW-3) Calculation of factory lighting: Factory lighting 160 Add: Outstaneing, 60 220 (Wea) Calculation of depreciation: 520x5% = 26 (W-5) Calculation of plant & machinery: Plant & machinery 10,000 Add: Addition 4,000 14,000 (W-6) Calculation of office furniture: Office furniture 520 Less: Depreciation (W-4) 06) 494 (w-) Calculation of net debtors: Debtors 9,140 Less: Bad debts (140) Less: Provision for bad debts (600) Less: Provision for discount on debtors (W-9) 168 8,232 (W8) Caleulation of provision for bad debts charge to profit & loss account ___ Provision for bad debts — {Paniculats | Amount | Particulars Amouni_} Rs. Rs. | Debtors 140 | Balance b/d 500 Balance e/d 600 | Bad debts 240 740 | 740 Chapter - 13Chapter -13 (W-9) Calculatfon of provision for discount on debtors: Question # 2: (W-1), PRACTICE QUESTION SOLUTIONS (247) (9,140 ~ 140 - 600) x 2% = 160 HARIS & Co. ‘Trading and profit & loss account : For the year ended March 31,1998 ___ - Particulars ‘Amount Particulars ‘Amount Rs. Rs Opening stock 100,000 | Sales (W-2) 622,000 Purchases (W-1) 278,060 | Closing stock 120,000 Wages 40,000 Gross profit e/d 324,000 742,000 . | 742.000 | Salaries (W-3) {62,000 | Gross profit b/d 324,000 Rent 30,000 | Interest 8,000 | Printing & stationery 16,000 Insurance (W-4) 20,000 Office expenses (W-5) 40,000 | Bad debts 22,000 Depreciation 4,000 Net profit (transferred to capital account) js32;000T HARIS Co. Balance Sheet __As on March 31, 1998. Liabilities Amount ‘Assets ‘Amount Rs. Rs. Capital 200,000 32,000 Add: Net profit 138,000 Stock 120,000 338,000 Debtors (W-7) 380,000 Less: Drawings (60,000) | 278,000 | Prepaid salary 4,000 | Prepaid insurance 4,000 Creditors 240,000 | Outstanding salary 6,000 Outstanding office expenses 16,000 . 40,000 |_540,000 | Calculation of net purchases: Purchases Less; Returns Less: Drawings Working notes 300,000 (10,000) 12,000) 278,000(248) ILMI FUNDAMENTALS OF ACCOUNTING Chapter - 13 (W2) Calculation of net sales: Sales 642,000 Less: Returns 20,000) 622,000 (W-3) Calculation of salaries: Salaries 60,000 Add: Outstanding 6,000 Less: Prepaid (4,000) 62,000 (W-4) Calculation of insurance: Insurance 24,000 Less: Prepaid 4,000) 20,000 (w-5) Calculation of office expenses Office expenses 24,000 Add: Outstanding 16,000 40,000 (w-5) Calculation of office furniture: Furniture 40,000 Less: Depreciation 8,000) 32,000 (we) Calculation of net debtors: Debtors 400,000 Less: Provision for bad debts 20,000, 380,000Chapter -13 Question #3: PRACTICE QUESTION SOLUTIONS, Mr, OMER ‘Trading and profit & loss account For the year ended March 31, 2006. Particulars Amount | _ Particulars Amount Rs. Rs. Opening stock 54,700 | Sales 370,000 Purchases 314,000 | Closing stock 30,000 ‘Wages (W-1) 20,900 Carriage inwards 2,240 Gross profit e/d 8,160 400,000 700,000 Rent & rates (W-2) 1,500 | Gross profit b/d 8,160 Sundry expenses 3,980 | Bank interest 150 Interest on loan 500 | Dividend (W-4) 1,340 Discount allowed 1,260 | Nat loss (transferred to capital Bad debts 200 | account) 10,770 Provision for bad debts (W-9) 1,080 Depreciation (W-3) 11,900 20,420 | {20,420 | Mr. OMER Balance Sheet ~ ‘As on March 31, 2006. - C_ Liabilities ‘Amount Assets ‘Amount | | Rs. Rs, Capital 94,780 Building (W-5) 28,500 Add: Net loss (19.770) Motor van (W-6) } 15,000 84,010 Furniture 6,000 Less: Drawings 6,050) | 77,960 | Loose tools (W-7) 1,600 | Stock | 30,000 Loan 5,000 | Debtors (W-7) 13,000 Creditors 38,000 | Investments 14,720 Outstanding wages 900 | Dividend aceryed 270 Interest accrued on loan 500 | Prepaid rates, 200 Bills payable 20,000 | Cash at bank | 32,400 Cash in hand | 670 142,360 Working notes (W-1) Calculation of wages: Salaries Add: Outstanding 20,000 900 20,200250) ILMI FUNDAMENTALS OF ACCOUNTING Chapter ~ 13 w-2) Calculation of rent & rates Rent & rates 1,700 Less: Prepaid (200) 1,500 W3) Calculation of depreciation: Building (30,000 x 5%) 1,500 Motor van (25,000 x 40%) 10,000 Loose tools (2,000 ~ 1,600) (wea) Calculation of dividend: Dividend 1,070 ‘Add: Accrued 270 1340 (W-5) Calculation of building: Building 30,000 Less: Depreciation (W-3) 500) . 28,500 (w4) Calculation of motor van: Motor van 25,000 Less: Depreciation (W-3) 10,000) 15,000 (w-7) Calculation of loose tools: Loose tools 2,000 Less: Depreciation (W-3) 400) 4,600 (wW-8) Calculation of net debtors: Debtors 19,000 Less: Bad debis (600) Less: Provision for bad debts (W-9) 3,680) 14,720Chapter -13 (W-9) PRACTICE QUESTION SOLUTIONS Calculation of provision for bad debts charyed to profit & loss account: Provision for bad debts [Particulars | Amount | Particulars | Amount Rs, Rs. Debtors 600 | Balance b/d 3,200 Balance c/d 3,680 | Bad debts 1,080 740 | 740, Question # 4: Mr. ASIF Trading and pro For the year ended March 31, 1997. fit & loss account __ Particulars ‘Amount _Particulars | Amount Rs. Rs. Opening stock 60,000 | Sales (W-2) 352,000 Purchases (W-1) 118,500 | Closing stock 70,000 Manufacturing wages 20,000 Carriage inwards | 1,500 Gross profit c/d [222,000 [422,000 Salaries. 13,600 | Gross profit b/d Carriage out 2,400 | Discount received | Rent, rates & taxes 20,000 | Bad debts recovered (W-6) Advertisement 4,000 Discount 700 Bank charges 150 Depreciation (W-3) 9,600 Interest on capital (W-7) | 5,000 Net profit (transferred to capital | account) 168,200 7 Ll 223,650, 223,650 Mr. ASIF oe Balance Sheet _ As on March 31, 1997. Liabilities Amount | ‘Assets ‘Amount | Rs. Rs. | Capital Plant & machinery (W-4) 150,400 | | Add: Net profit Stock 70,000 | Debtors (W-5) 89,000 | ‘Add: Interest 273,200 | Cash at bank 12,000 Cash in hand 1,800 Creditors 323,200 (251)(252) ILMI FUNDAMENTALS OF ACCOUNTING: Chapter - 13 Working notes (W-1) Calculation of net purchases: Purchases 120,000 Less: Drawings 1,500) 118,500 (W2) Calculation of net sales: Sales 354,000 Less: Returns (2,000) 352,000, (W3) Calculation of depreciation: Plant & machinery 160,000 x 6% 9,600 (Wt) Calculation of plant & machinery Plant & machinery 160,000 f Less: Depreciation (W-3) (9,600) 150,400 (W-5) Calculation of net debtors: Debtors 90,000 Less: Provision for bad debts (W-6) 1,000 89,000 (W-6) Calculation of provision for bad debts charge to profit & loss account Provision for bad debts { Particulars Amount | Particulars | Amount Rs. Rs. Bad debts recovered 50 | Balance b/d 1,050 | Balance c/d 1,000 _ L: 1,050 1,050 (w-7) Calculatfon of interest on capital: 100,000 x 5% = 5,000Chapter -13 Question # 5: Stock Purchases Less: Drawings Wages GPold General expenses Depreciation Liabilities Creditors Wages outstanding, Capital Less: Drawings Less: Net loss PRACTICE QUESTION SOLUTIONS. ATrader ‘Trading and profit & loss account For the year ended December 31, 2005 Rs. 7,000 Sales 160,400. Stock (200) 160,200 Value 14,400 Write off 9,100 192,700 10,340 G.P. bid 760 Profit on sale of furniture Sales price BV Net Loss A Trader Balance sheet As on December 31, 2005 Rs, Assets 7,800 Furniture 100 Less: Sales 65,400 Less: Depreciation (10,460) Goodwill 1,860) 53,080 Stock Debtors Cash in hand 9,000 (900) 900 760) 8,000 (760) 760) Rs, 184,600 8.100 192,700 9,100 140 1,800 11,100 6,480 6,000 8,100 38,400 2,000 60,980 (253)(254) ILMI FUNDAMENTALS OF ACCOUNTING Chapter 13 Question # 1: oss profit : Gross profit ratio x100 Netsales 250,000-130,000 250,000 x100 120,000 250,000 x100 = 48% Question # 2: — (Other operating exp. + Financial cost + Tax exp.) Net profit, =° G = 150,000 — (60,000 + 15,000 + 25,000) = 150,000 - 100,000 = 50,000 Netprofitaftertax —eEee Netsales Net profit ratio = 100 50,000 = 16.67% Question # 3: Profit after tax~Preferencedividend Averageequity ROE = 100 20,000 190,000 x100 = (47.37% Question # 4: Net working capital Current assets ~ Current liabilities = 70,000 40,000Chapter -13 PRACTICE QUESTION SOLUTIONS. (255) = 30,000 Question # 5: Currentassets Current ratio = —— - Current liabilities 180,000 150,000, = 12:1ILMLFUNDAMENTALS OF A\ CCOUNTING F ERRORS Plant & machinery Plant & machinery LF Dr.(Rs) Cr. (Rs) 9,200 — 9,200 1,800 1,800 680 7 680 1,500 Creditor (1,540 -154) 1,400 1,400 4,000 oo _ 4,000 6,000 — ___6,000, 360 LF Dr.(Rs) Cr. (Rs) 300 = __ 300 1,386 1,386 3,200 3,200 Se 3,200 ‘ 320 320 320 320 640Chapter -13 PRACTICE QUESTION SOLUTIONS 257) (Sundry dedtors Suspense (g) Discount allowed 60 Suspense _ en) (hy) Rates 200 ‘Suspense. 200 ‘Suspense account Date Details Rs. Date Details Rs. Customer 320 Purchases 300 Creditors 1,386 Debtors 1,600 Discount allowed 60, Balance b/d 3,226 Rates 200 3,546 3,546 Question # 3: Date Particulars LF Drs) Cr. (Rs) 1998 (a) P&L Adjustment 4,529 Motor car 1,329 Suspense _ 200 (b) P&L Adjustment 1,440 __J.DANIYAL. 1,440 (©) Suspense 1,800 ___P.& L Adjustment _ 1,800 (4) Suspense 1,600 P&L Adjustment __ 1,600 (©) Machinery 48,000 P&L Adjustment _ 48,000 () THSAN 4,000 ; Suspense — _ 4,000 (g) OMER (12,384 + 184) 12,568 P&L Adjustment 1,432 ZEESHAN 14,000 Suspense account Date Details Rs, Date Details Rs, P&L Adjustment 1,600 P&L Adjustment 3.200 P&L Adjustment 1,600 IHSAN 4,000 Balance b/d 4,000 7,200 7,200(258) ILMI FUNDAMENTALS OF ACCOUNTING. Chapter - 13 Question # 1: Mr. BILAL, ‘Trading and profit & loss account For the year ended December 31, 2000 Particulars Rs, Particulars Rs, Purchases 150,000 Sales 200,000 Less: Drawings 2,600) 147,400 Closing stock 20,000 Carriage inwards 1,400 Wages 600 Gross profit e/d 70,600 = 220,06 0,000 Salaries 2,400 Gross profit b/d 70.600 Discount allowed 1,600 Bad debts 3,000 Advertisement 4,400 Trade expenses 2,400 Depreciation (48,000 x 0.10) 4,800 Net profit 42,000 70,600 70,600 Mr. BILAL, Balance sheet For the year ended December, 31 2000 Liabilities Rs, Assets Rs. Capital Furniture 48,000 Opening 90,000 Less: Depreciation (4,800) 43,200 Add: Gift 6,000 Closing stock 20,000 Add: N.P 42,000 Debtors Less: Drawings (18,000) 120,000 Cash in hand (W-) Loan (Father's) 10,000 Creditors 30,000 160,000 160,000 Working notes (wel) Cash Rs. Rs Capital 90,000 Furniture 48,000 Loan 10,000 Drawings (1.200 x 12) 14,400 pital 6,000 Purchases 20,000 Sales (Cash) 60,000 Carriage inwards 1400 Sundry debtors (W-2) 93,400 Wages 600 Salaries 12,400Chapter -13 (w.2) Sales (W-3) Cash (B.F) Balance e/d Question # 2: Opening stock Purchases, GP old Expenses Interest Salaries Depreciation: Building niture Motor cycle Net profit PRACTICE QUESTION SOLUTIONS. ‘Trading and profit & loss account For the year ended December 31, 1998 7,200 480 120 Drawings Creditors (W-3) Balance c/d 259,400 Debtors Rs. 140,000 Cash (B.F) Discount allowed Bad debts Balance cfd Creditor Rs, 100,000 Purchases 30,000 130,000 ‘Trade expenses Advertisement Mr. QASIM KHAN Rs, 43,200 60,000 180,960 284,160 38,040 360 40,800 7,800 93,960 180,960 Sales Cash Credit Closing Stock Gross profit bid 76,800 158,800 2,400 4,400 1,000 100.000 54,800 259,400 Rs. 93.400 1,600 3,000 42,000 140,000 Rs, 130,000 130,000 235.200 48,960 284,160 180,960, 180,960 (259)(260) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Mr. QASIM KHAN Balance sheet As on December 31, 1998 Liabilities Rs. Assets Rs. Capital: Buildings 72,000 Opening 168,400 Less: Depreciation (7.200) 64,800 Add: N.P 93,960 Furniture 4,800 Less: Drawings (9,600) 252,760 Less: Depreciation (480) 4,320 Motor cycle 4,800 Creditors 26,400 Less: Deprecation (120) 4,680 Stock 48,960 Debtors 144,000 Bank 11,640 ——_ Cash —160 279,160 279,160 Working notes . On) Cash book Cash Bank Cash Bank Balance b/d 400 - Balance bid = 19,200 Cash sales 76,800 - Bank (C) 191,640 - Debtors 120,000 = Motor cycle 4.800 - Cash (C) - 191,640 Expenses - 38,040 Interest - 360 Salaries - 40,800 Drawings - 9,600 Creditors - 72,000 Balance cid 11,640 197,200 191,640 191,640 (W2) Balance sheet As on January 1, 1998 Liabilities Rs, Assets Rs. Creditors 38.400 Buildings 72,000 Bank overdraft 19,200 Furniture 4,800 Capital (B.F) 168,400 Stock 43,200 Debtors 105,600, Cash 400 226,000 226,000Chapter -13 PRACTICE QUESTION SOLUTIONS 261) (W-3) Debtors account Rs, Balance bid 105,600 Cash Sales (B.F) 158.400 Balance e/d 144,000 264,000 . 264,000 (Wa) Creditors account Rs. Rs. Bank 72,000 Balance b/d 38,400 Balance cid 26.400 Purchases (B.F) 60,000 98,400 28,400 Question # 3: MIS GORAYA & Co. ‘Trading and profit & loss account For the year ended March 31, 2003 Rs. Rs Opening stock 140,000 Sales (W-3) 2,560,000 Purchases (W-1) 1,832,000 Closing stock 180,000 GP c/d (2,560,000 x 0.3) 768,000 “s 2,740,000 2,240,000 Miscellaneous expense 19,160 GP b/d 768,000 Salaries 120,000 Discountallowed 24,960 Car expenses 46,000 ‘, Rent 60,000 i Printing & stationery 12,800 Rates & taxes 6,000 Carriage outwards 37,200 ‘Traveling expenses 29,800 Depreciation: Car 36,000 Van 48,000 Furniture 2,000 86,000 Net Profit 376,000 792,960 792,960 M/S GORAYA & Co. Balance sheet As on March, 31 2003 Rs. Assets Rs. Creditors 118,000 Car 180,000 Capital > Less: Depreciation (36,000) 144,000 Opening $362,000 Delivery van 240,000(262) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Add: NP 376,000 Less: Depreciation (48,000) 192,000 Less: Drawings (198,000) 540,000 Furniture 20,000 Less: Depreciation (2,000) 18,000 Stock 180.000 Debtors 92,000 Bank 32,000 658,000 g notes (W-1) Total purchases for the period = 1,000,000 + 24,960 / 0.03 = 1,000,000 + 832,000 = 1,832,000 (W-2) Cost of goods sold for the period = Opening Stock + Purchases ~ Closing Stock = 140,000 + 1.832.000 — 180,000 = 1,792,000 (wW-3) Sales for period = When gross protit is 30% on sales. cost of goods sold is 70% of sales. Therefore, sales is 1,792,000 / 70% 2,560,000 (w-4) Creditors account Rs Rs Bank 1,809,040 Balance bid 120.000 Discount received 24,960 Purchased 1,832,000 Balance c/d » 1,952,000 (w-s) Balance sheet As on April 1, 2002 Liabilities Rs. Assets Rs, Capital 362,000 Car 180,000 + Creditors Furniture 20,000 Stock 140,000 Debtors 124.009Chapter -13 PRACTICE QUESTION SOLUTIONS (263) _____ Bank 18,000 482,000 482,000 (6) Debtors account Rs, Rs, Balance b/d 124,000 Receipts (Balance) 2,592,000 * Sales 2,560,000 Balance e/d 92,000 2,684,000 34,000 (w-7) Balance b/d Receipis from (W-6) Question # 4: pening stock Purchases GP Expenses Pepreciation wash destroyed Net Profit Bank account Rs. 18,000 2,592,000 0,000 Payment to creditors Salaries Car expenses Travelling Delivery van Miscellaneous expenses Rent Printing & stationary Drawings Rates & taxes Carriage outwards Drawings (Balance) Balance e/d Mr. SHAHZAD, ‘Trading and profit & loss account for the year ended March 31, 2007 Rs. +000" 80. 720 1,080 1,880 500 “4 20 486 1,080 Sales: Cash 360 Credit 140 Closing stock GP bid Rs, 1.809.040 120,000 46,000, 29,800 240,000 19,160. 60,000 12,800 100,000 6,000 37,200 98,000 — 32,000 2,610,000 Rs, “000° 1,800 80. 1,880 1,080 1,080)(264) ILMI FUNDAMENTALS OF ACCOUNTING Mr. SHAHZAD. Balance sheet As on March 31, 2007 Rs.1000° Assets Capital: Fixed assets Opening balance 400 ‘Add: Purchased Add: NP 486 Less: depreciation Less: Drawing (100) 786 Stock Creditors 120 Debtors Bank 9 Working notes (wel) Cash book Cash Bank Balance b/d 10 20 Creditors Debtors 240 1,180 Drawings Cash sales 360 - Bank Cash (C) : 240 Expenses Fixed assets Cash destroyed _ Balance e/d 610 1440 (W-2) Calculation of sales Debtors opening balance Debtor balance (100 + 20% of 100) One month’s credit sales = Debtors Therefore total credit Sales = 120 x 12 1,440 80% Total sales = Cash sales 20% of 1,800 (wW-3) Calculation of purchases Creditors opening balance Creditors closing bal. (100 + 20% of 100) Two month's credit purchases = Creditors = 120 Chapter - 13 Cash 100 240 250 20 ra Rs.7000" 100 120 1,440 1,800 360 100 120 906 Bank 600 100 250 450 —40 LadoChapter -13 PRACTICE QUESTION SOLUTIONS _(265) Therefore, total credit purchases = 120 x 6 720 (wea) Closing bank balance Creditors i.e, Current liabilities = 120,000 Current assets = 120,000 x2 = 240,000 Bank balance = Current assets ~ Stock — Debtors = 240,090 - 89,000 ~ 120,000 = 40,000 Question # 5: Mr. CHEEMA ‘Trading and profit & loss account For the year ended March 31, 2003 Rs, Rs. Opening stock 100,000 Sales 1,200,000 Purchases (B.P) 1,072,000 Advertisement 12,000 G.P c/d (20% of 1,200,000) 240,000 Accidental loss _____ Closing stock 1,412,000 Expenses (B.F) 80,000 G.P b/d Advertisement (Free samples) 12,000 Discount received Discount allowed 24,000 Recovery of B.D Accidental loss 10,000 Depreciation: Furniture 18,200 Equipment 10,800 29,000 Net Profit 105,000 _ 260,000 260,000 Balance sheet As on March-31-2003 s Rs, Assets Rs. Capital: Fumiture 162,000 Opening 420,000 ‘Add: Purchases (BF) 20,000 Add: Introduced 24,000 Less: Depreciation 163,800, Add: N.P 105,000 Equipment 108,000 Less: Drawings (60,000) 489,000 Less: Depreciation (10,800). 97,200 Creditors 80,000 Stock 150,000 Debtors 148,000 Cash & bank 10,000 569,000 569,000(206) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Working notes (wey Balance sheet As on March 31, 2002 Liabilities Rs. Assets Rs. Capital (B.F) 420,000 Furniture e 162,000 Creditors 240,000 Equipment 108,000 Stock 100,000 Debtors 170,000 Cash & bank 120,000 660,000 (W-2) Actual value of debtors - Balance 104.000 insurance elaim 40,000 Recovery of bad debts 4,000, 148,000 (W33) Cash and bank account Rs, Rs. Bank bid 120,000 Furniture 20,000 Debtors 1,198,000 Creditors 1,192,000 Insurance claim 40,000 Drawings 60,000 Bad debts recovery 4,000 Miscellaneous expenses 80,000 ____ Balance e/d 10,000 1,362,000 1,362,000 (wa) Debtors Rs, Rs Balance bid 170,000 Bank 1.198.000 Sales 1,200,000 Discount allowed 24,000 Balance e/d 148,000 1,370,000 1,370,000 Creditors Rs. Rs. Capital 24,000 Balance b/d 240,000 Discount received 16,000 Purchases 1,072,000 Bank 1,192,000 Balance e/d 80,000Chapter- 13 PRACTICE QUESTION SOLUTIONS. (267) 1:312,000 1,312,000 Question # 6: Calculation of net income Rs. Rs. Increase in assets (It mean increase in capital): Cash 195,000. Finished good stock Less: Decrease in assets and increase in Liabilities: : Trade debts 45,000 Bill payable 150,000- Trade creditor 75,000 270,000 Loan borrowed 360,000 Mark up accrued 7,500 (Cr.) 637,500 Decrease in capital (Cr.) 22,500 Statement of profit & loss For the year ended 1992 Net decrease in capital (22,500) Add: Drawings 234,000 Less: Additional investment 126,000 Profit for the year 85,500 Question #7: PANORAMA RETAIL STORE ‘Trading and profit & loss account For the year ended December 31, 1991 ~ Sales (W-3) Less: Cost of sales ~ ‘ Opening stock 1,590 Purchases (W-) 7,950 Less: Closing stock (1,200) 1840 Gross Profit 2.380 Less: Rent 250 General expenses 180 Depreciation (800 x 10%) 80 S10 Net profit for the year L870 Balance sheet As at December 31, 1991 Rs. Rs. Capital 31-12-90 (W-1) 4.300 Fixture 800 Add: Profit for the year 1,820 Less: depreciation(268) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 6,120 Stock 1,700 Less: Drawing 20 6,100 Debtor 1.320 Creditor for goods 650 Bank 3.050 Rent owing 50 Cash 10 6.28 6,800 Working notes (w-t) Balance sheet Asat December 31, 1990 Equity & liabilities Rs, Assets Rs Capital (Balance) 4,300 Fixtures 800 Creditor 400 Stock 1,390 Debtor 1.100 ~- Bank 1.130 Cash __80 4,700 4,700 i) . Bank and cash 7 Bank Cash Bank Cash - Rs. Rs . Rs. Rs. Balance b/d 1,130 80 Rent 200 50 Debtor 9,500 500 General 180 Drawing - Creditor (Balance) 7.200 ____ Ballance e/d 3,050 380 10,630 (W-3) Debtors Rs, Balance b/d 1,100 Bank Sales (Balance) 10,220 Cash Balance e/d 11,320 (we) Creditors Rs. Rs. Bank (W-2) 7,200 Balance b/d 400 Cash (W-2) 500 Purchases (Balance) 7.950 Balance cid 650 8,350 8,350Chapter - 13, PRACTICE QUESTION SOLUTIONS (269) INV TORIES Question # 1: Jahangir Ltd. Stock ledger (FIFO) iG Receipts Issues Balance Qty Rate Rupees | Qty Rate Rupees | Qty. Rate Rupees Jani 1,000 1,200 _ 1,200,000 Mar 31] 2.000 1,240. 2,480,000 1,000 1,200 1,200,000 2,000 1,240 2,480,000 Mar 31 1,000 1,200 1,200,000 200 1,240 248,000] 1,800 Jun 30 | 4,200 1,260 5,259,000 1,800 1.240 2,232,000 4.200 1,260 5,259,000 Jun 30 1,800 1,240 2,232,000 600 1,260 756,000] 3,600 1,260 4.536.000 Sep30] 1.400 1,280 1,792,000 3,600 1,260 4,536,000 1,400 _ 1,280 _ 1,792,000 Sep 30 3,000 1,260 3,780,000] 600 1,260 756,000 1,400 1,280_1,792,000 Dec 31] 2400 1,340 3,216,000 600 1,260 756,000 1,400 1,280 1,792,000 2,400 1.340 _ 3,216,000 Dee 31 600 1,260 756,000 1,400 1,280 1,792,000 700 1,340 938,000} 1,700 1.340 2,278,000 10,000 12,780,000 [9,300 11,702,000 | _1.700 2,278,000 Jahangir Ltd. Stock Ledger (Weighted average) we Receipts Issues Balai Qty Rate Rupees | Qty Rate Rupees_| Qty. Rate Rupes Jan | 1,000 1.200 1,200,000 Mar [2,000 1,240 2,480,000 3,000 1226.67 3,680,000 Mar 1,200 1226.67 1,472,000 | 1,800 1226.67 2,208,000 Jun 30 | 4,200 1,260 _ 5,292,000 6,000 07,500,000 Jun 30 2,400 1,250 -3,000,000 | 3,600 04,500,000 sep 30 | 1,400 1,280 1,792.00 5,000 12584 6.292.000 Sep 30 3000 1258.4 3,775,200] 2,000 12584 2.516.800 Dec 31] 2400 1,340 3,216,000 4.400 1302.91 5,732,800270) ILMI FUNDAMENTALS OF ACCOUNTING Chapter -13 Dec 31 2,700 1302.91 _ 3,517,857 | 1,700_ 1302.91 2,214,943 10,000 1,278,000 | 9,300 11,765,057 | 1,700 2,214,943 Question # 2: Quality Brush Company Stock ledger sheet (FIFO) ‘As on October 1974 nt Receipts Issues Balance ate [ay Rate “Rupees [Qty Rate _ Rupees { Qty. Rate Rupees 1 Oct 10,0010 100,000 TOct | 4.000 22.5 90.000 10.000 10 100.000 4,000 22.5 90,000 14 Oe | 6.00015 90,000 10,000 10 _100,000 4,000 22.5 90.000 6,000 1590.00 16" Oct 10,000 10 100,000 4,000 22.5 90,000 2,000 15 30,000] 4,000 15 60,000 24" Oct | 8.000 16.5 132,000 4,000 15 60,000 8,000 16.5 132,000 28" Oct 4000-15 60,000 6.000 16.6 99,000] 2,000 16.5 33,000 2,000 33.000 Quality Brush Company Stock ledger sheet (Weighted average) As on October 1974 non Receipts Issues Balance ay | @ Rs | Qy | @ Rs | Qy [| @ Rs. 1 Oct 10000 10 | 100.000 TOct_[ 4000 [22.5 | 90,000 14000 | 13.5714 | 190.000 14" Get [6000 15 | 90,000. 20000 14 | 280.000. 16 Oct 16000 14 | 224,000 | 4000. 14 [36.000 24" Oct [8000 [16.5 | 132,000 12000 | 15.6667 | 188,000 28" Oct 10000 | 15.667 | 156,667 | 2000 [15.6667 | 31,333 Total 2000, 31.333Chapter -13 Question #1: W.l) PRACTICE QUESTION SOLUTIONS TEM OF CASH ABC Brothers Statement of cash flows hod) For the year Ended June 30, 2003 ash flow from operating activities Profit before tax Adjustment Depreciation Interest Cash flow before changes in working capital (Increase) / Decrease in current assets Inventory Prepaid expense Trade debts. Increase / (Decrease) in current liabilities: ‘Accounts payable Accrued liabilities Cash flow from operations Income tax paid Interest paid Net cash flow from operating activiti Cash flow from investing activities Land acquired Building acquired Net cash used in investing activities h flow from finaneing activities Ga Long term loans raised Net cash flow from financing activities Net increase / (Decrease) in cash flows Opening balance of cash & cash equivalents Closing balance of cash & cash equivalents Cash Balance eld Working notes Rs. 29,000 Balance bid 5,000 P&L 34,000 Rs, Rs, 99,000 10,000 11,000 120,000, (45,000) 2,000 (22,000) 5,000 1,000 61,000 (29,000) 11,000) 21,000 (20,000) (140,000) (160,000) 10,000 (49,000) 155,000 116,000 (23,000) 28,000 5,000 Rs 4,000 30,000 4,000 7)en) (w-2) Question # 2: (Wel) ILMI FUNDAMENTALS OF ACCOUNTING Cash & cash equivalents Opening balance Cash 28,000 Johan Flynn Cash flow statement Closing balance For the year ended December 31, 20x9 Cash flow from operating act Net profit Adjustment: Depreciation Cash flow before changes in working capital (Increase) / Decrease in current assets: Stock Trade debts Increase / (Decrease) in current liabilities Creditors Net cash flow from operating activities Cash flow form investing activities Fixtures bought Van bought Net cash used in investing activities h flow from financing activities Loan raised Additional capital Drawings Net cash used in financing activities Net increase / (Decrease) in cash flows Opening balance of cash & cash equivalents Closing balance of cash & cash Equivalents Working notes Fixtures Rs. Balance b/d 1,800 Depreciation Cash 400 Balance e/d 2,200 5,000 Rs. Rs. 7,900 1,620 9,520 (5,410) (1,110) (860) 2.140 (400) (4,000) (4,400) 3,000 2,500 (2.800) (2,300) (4,560) 3,450 (110) Rs. 200 2,000 2,200 Chapter -13Saeiee neti] + Cost Accounting + Strategic Management Accounting | KITAB KHANA