Additional materials on Profit & Loss Account and Balance Sheet.
Solution:
The above table showing balances of the accounts which has been prepared from ledger. As we already
know that the accounting process where our next step is to prepare “Trial Balance”. Then only we
prepare “Profit & Loss statement” and “Balance Sheet”. Therefore, we will firstly prepare the Trial
Balance.
Table 1: Trial Balance
Trial Balance as at …........
Particulars Debit Particulars Credit
Carriage on goods purchased 8000 Creditors 61000
Carriage on goods sold 3500 Bank Overdraft 30000
Manufacturing Expenses 42000 Interest on Investments 4500
Advertisements 7000 Capital 10000
0
Excise Duty 6000 Sales Less Return 52000
0
Factory Lightings 4400 Discount on Purchases 3400
Debtors 80000
Dock Clearing Charges 5200
Postage and Telegram 800
Fire Insurance Premium 3600
Patents 12000
Income Tax 24000
Office Expenses 7200
Cash in hand 2500
Drawings 8000
Motor Car 60000
Audit Fees 2700
Plant 153900
Repairs on Plant 2200
Purchase less Returns 160000
Commission on Purchase 2000
Incidental Trade Expenses 3200
Investments 30000
Sales Tax Paid 12000
Discount Allowed 2700
Stock at the end 76000
718900 71890
0
Table 2: Profit & Loss Account
Profit & Loss Account for the years ended …...
Particulars Amount Amount
Sales less returns 520000
Less: Cost of goods sold
Purchase less returns 160000
Commission on purchase 2000
Carriage on goods purchased 8000
Manufacturing Expenses 42000
Factory Lightings 4400
Dock and clearing charges 5200 (221600)
Gross Profit 298400
Add:
Interest on Investments 4500
Discount on purchase 3400
Income 306300
Less:
Carriage on goods sold 3500
Advertisement 7000
Excise Duty 6000
Postage and telegram 800
Fire Insurance Premium 3600
Office Expenses 7200
Audit Fees 2700
Repairs to Plant 2200
Incidental trading expenses 3200
Sales tax paid 12000
Discount Allowed 2700 (50900)
Net Profit (Transferred to Capital A/C) 255400
Table 3: Balance Sheet
Balance Sheet as on …....
Liabilities Amount Amount Assets Amount Amount
Capital 100000 Patents 12000
Add: Net Profit 255400 Plant 153900
355400 Motor Car 60000
Less: Drawings (8000) Investments 30000
347400 Closing Stock 76000
Less: Income Tax (24000) 323400 Debtors 80000
Bank Overdraft 30000 Cash in hand 2500
Creditors 61000
414400 414400
Solution:
The above table showing balances of the accounts which has been prepared from ledger. As we already
know that the accounting process where our next step is to prepare “Trial Balance”. Then only we
prepare “Profit & Loss statement” and “Balance Sheet”. Therefore, we will firstly prepare the Trial
Balance.
Table 4: Trial Balance
Trial Balance as on …........
Particulars Debit Particulars Credit
Opening Stock 15310 Sales 256000
Purchases 82400 Returns (Cr.) 2400
Returns (Dr.) 4000 Commission (Cr.) 1200
Factory Rent 18000 Bad debts Recovered 2000
Customs Duty 11500 Capital 250000
Coal, gas & power 6000 Sundry Creditors 12000
Wages & Salary 36600 Sales Tax Collected 2000
Discount (Dr.) 7500 Loan (Cr.) 25000
Bad debts 5850 Apprenticeship Premium 4800
Production expenses 2600
Administrative expenses 5000
Carriage 8700
Drawings 48000
Sundry Debtors 57000
Depreciation 4200
Charity 500
Cash Balance 4460
Bank Balance 4000
Bank Charges 180
Establishment expenses 3600
Plant 42000
Leasehold Buildings 150000
Goodwill 20000
Patents 10000
Trademarks 5000
Interest on loan 3000
555400 555400
Table 5: Profit & Loss Account
Profit & Loss Account for the years ended …...
Particulars Amount Amount Amount
Sales 256000
Less: Returns 4000
Net Sales 252000
Less:
Cost of goods sold:
Opening stock 15310
Add: Purchases less returns (82400 -2400) 80000
Less: Closing stock (25400) 69910
Factory Rent 18000
Custom Duty 11500
Coal, gas & power 6000
Wages & Salary 36600
Production expenses 2600
Carriage 8700 (153310)
Gross Profit 98690
Add: Commission 1200
Bad debts recovered 2000
Apprenticeship premium 4800 8000
Income 106690
Less:
Discount (Dr.) 7500
Bad debts 5850
Administrative expenses 5000
Depreciation 4200
Charity 500
Bank Charges 180
Establishment expenses 3600
Interest on Loan 3000 (29830)
Net Profit (Transferred to Capital A/C) 76860
Table 6: Balance Sheet
Balance Sheet as on …....
Liabilities Amount Amount Assets Amount Amount
Capital 250000 Plant 42000
Add: Net Profit 76860 Patents 10000
326860 Goodwill 5000
Less: Drawings 48000 278860 Trademarks 20000
Loan 25000 Leasehold Building 150000
Sundry Creditors 12000 Closing Stock 25400
Sales tax collected 2000 Sundry debtors 57000
Cash Balance 4460
Bank Balance 4000
317860 317860
Additional Materials on Activity Ratio
Activity ratios, also known as turnover ratios, are essential yardsticks in financial analysis. These ratios
enable people to evaluate a company’s operational performance and effectiveness. Activity ratios are
as follows:
1. Inventory/Stock Turnover Ratio.
2. Receivable Turnover Ratio.
3. Payables Turnover Ratio.
4. Working Capital Turnover Ratio.
Inventory/Stock Turnover Ratio: Stock/Inventory Turnover Ratio provides insights into how
efficiently a company manages its inventory and converts it into sales. Formula used for the ratio is: -
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Where 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 means average of the values of opening inventory and closing inventory.
In case solution of Illustration 9, Cost of Goods Sold is equal to Rs. 69,910 and Average Inventory is
equal to Rs. 20,355 [(15310+25400)/2]. Therefore, Inventory Turnover Ratio is 3.43.
Higher the ratio suggests that higher efficiency and conversely lower ratio suggests that lower
efficiency.
Receivable Turnover Ratio: Receivable Turnover Ratio provides insights into how successfully a
business collects its payments from its clients for credit sales. Formula as follows: -
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
In Illustration 9, Net Credit Sales is equal to Rs. 2,52,000 (as credit sales figures are not Explicitly
available, therefore, net sales figure has been used) and Average Accounts Receivables is equal to Rs.
57,000 (again we do not have both opening and closing debtors, therefore, we have used Debtors as a
proxy to it). Therefore, Receivable Turnover Ratio is 4.42.
Higher the ratio suggests that prompt payment collection or efficient credit management, therefore,
less credit risk and Vise Versa.
Payables Turnover Ratio: Payables Turnover Ratio provides insights into how successfully a business
pays its supplier for credit Purchase. Formula as follows: -
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
In Illustration 9, Cost of Goods Sold is equal to Rs. 69,910 and Average Accounts Payables is equal to
Rs. 12,000 (we do not have both opening and closing creditors, therefore, we have used creditors as a
proxy to it). Therefore, Payables Turnover Ratio is 5.83.
Higher the ratio suggests that timely payment, strong cash flow and positive supplier relationship and
Vise Versa.
Working Capital Turnover Ratio: Working Capital Turnover Ratio provides insights into how
efficiently a business use its own working capital to support its sales. Formula as follows: -
Net Sales
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
In Illustration 9, Net Sales is equal to Rs. 2,52,000 and Working Capital is equal to Rs. 90,860
(25,400+57,000+4460+4000). Therefore, Receivable Turnover Ratio is 2.77.
Higher the ratio suggests that the company is generating higher cash flows than its Working Capital.
Therefore, it shows that higher efficiency of the business. For lower ratio suggests exactly opposite of
it.
