MODULE - 3

Financial Statement

18
FINANCIAL STATEMENTS - II
Notes

You have learnt that Income Statement i.e. Trading & Profit and Loss Account and
Position Statement i.e., Balance Sheet are two financial statements, which are prepared
by every business concern at the end of a period. Income statement shows the Net
Profit or Net loss as the case may be for that period and Position Statement presents
the financial position of the business on the specific date. These statements are prepared
on the basis of Trial Balance and other information. It is possible that there are certain
items of income or expenses which do not pertain to the accounting period for which
Trial Balance is prepared or other such items which have accrued but have not been
accounted for and hence are not reflected in Trial Balance. Both these types of incomes
and expenses are to be fully accounted for, only then the above stated two statements
will show the true and fair position of the business. These are called ‘adjustments’. In
this lesson we shall learn about accounting treatment of some of the adjustments and
incorporation of these adjustments in financial statements.

OBJECTIVES
After studying this lesson you will be able to:
z recognise the need for accounting adjustments;
z explain the adjustments as to closing stock, outstanding and pre-paid expenses,
accrued income and income received in advance;
z interest on capital and drawings, depreciation, provision for bad and doubtful
debts; and
z incorporate the adjustments in Trading Account, Profit & Loss Account and Balance
Sheet.

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18.1 NEED FOR ACCOUNTING ADJUSTMENTS
You have already learnt that every business entity prepares Trading and Profit & Loss
Account and Balance Sheet, the two financial statements, at the end of an accounting
period which is generally one year. It needs to be ensured that such items of income
and expenditure which do not pertain to the said accounting period, should not to be
included. If some of these items have been included in the trial balance these must be
excluded by making necessary adjusting entry. Similarly, there can be items which are
left out and are needed to be accounted for. Adjustment entry will also be made for Notes
them. This is necessary in order to calculate the correct profit or loss and to show true
and fair financial position of the business. For example, a firm closes its books on March
31, every year, Suppose it has not paid rent of the shop for the month of March. This
will not be reflected in Trial Balance and hence it needs to be accounted for as it relates
to the year for which accounts are being prepared. Similarly, suppose annual insurance
premium has been paid up to June, 30. It means premium for three months has been
paid in advance. This is included in the item of insurance appearing in the Trial Balance.
This amount paid in advance needs to be excluded. This process of exclusion or inclusion
of items into books of accounts at the time of preparing finanacial statements is called
adjustments. These are to be incorporated to arrive at the true and fair position of the
business.

INTEXT QUESTIONS 18.1

Fill in the blanks with suitable word/words :
(i) Trading and Profit & Loss Account shows the ............... or ...............
(ii) Adjustments are necessary to show the correct ............... and ............... of a
business concern.
(iii) Items of income and expenditure which do not pertain to the accounting period
should be ...............
(iv) Items of income & expenditure which relate to the accounting period but are left
out should be ...............

18.2 ADJUSTMENTS AND THEIR INCORPORATION

The number and nature of adjustments differ from organisation to organisation. It depends
upon the volume and nature of activities in the organisation, However, certain adjustments
are common in all types of organisations. Moreover, while making adjustments you will
have to follow the general principle of double entry i.e. the amount is to be debited to
one account and credited to another account. Thus in the finanacial statements the item
to be adjusted should appear at two places one representing the debit and the other
representing the credit.

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Let us, now discuss some of the items of adjustment and their accounting treatment in
financial statements. These are as under :
1. Closing Stock
2. Outstanding Expenses.
3. Prepaid Expenses
4. Accrued Income.
5. Income received in advance
Notes 6. Interest on Capital
7. Interests on Drawings
8. Depreciation.
9. Further Bad Debts.
10. Provision for Bad and Doubtful Debts.
11. Provision for discount on debtors.
12. Managers Commission
13. Abnormal losses.
14. Drawing of Goods by the Proprietor.
15. Goods Distributed as free Sample.
Let us take up these adjustments one by one:
1. Closing Stock
Closing Stock is the stock of goods remaining unsold at the end of the accounting year.
Ordinarily this does not appear in the Trial Balance. Hence, this needs to be incorporated
in financial statements. This appears on the credit side of the Trading Account as well
as Assets side of the Balance Sheet.
The adjustment entry will be:
Closing Stock A/c Dr
To Trading A/c
(Closing stock transferred to trading A/c)
The effect of the adjustment entry on financial statements is as under :
Trading A/c
Dr Cr
Particulars Amount Particulars Amount
` `
Closing stock ......

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Financial Statement
Balance Sheet
Liabilities Amount Assets Amount
` `
Closing stock ........
In case closing stock has already been accounted for it will form part of the Trial
Balance and hence there is no need of making any adjustments in the Trading A/c. Then
the adjusted closing stock will be on the asset side of the Balance Sheet only. Notes
2. Outstanding Expenses
Expense which is related to the current accounting period but not yet paid is known as
Outstanding Expense. Suppose the accounts are closed on 31st December every year.
Salary for the month of December is due but not paid. It is an example of salary
outstanding. Similarly, there are some other items like Rent outstanding, Wages
outstanding etc. In case of Salaries Outstanding following adjustment entry will be
made :
Salary A/c Dr.
To Salary Outstanding A/c
(Salary outstanding for the month of December)
In financial statements it will be recorded as :
Profit & Loss A/c
Dr. Cr.
Particulars Amount Particulars Amount
` `
Salaries
Add : Salary outstanding

Balance Sheet
Liabilities Amount Assets Amount
` `
Salary Outstanding
Amount of expense outstanding will be added to its paid amount which is shown in the
Trading A/c or Profit & Loss A/c as the case may be. It is also shown on the liabilities
side of the Balance Sheet because it is an item of liabilities.

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3. Prepaid Expenses
Sometimes a part of a certain expense paid may relate to the next accounting period.
Such expenses is called prepaid expense or expenses paid in advance. For example,
insurance premium paid in the current year may be for the year ending, the date of
which falls in the next year. The part of insurance premium which relates to next accounting
year is the insurance premium paid in advance. It is deducted from the amount paid and
is shown as an item of asset. Similarly, such items may be rent prepaid, tax prepaid etc.
Notes
Adjustment entry for prepaid Insurance Premium
Prepaid Insurance Premium A/c Dr.
To Insurance Premium A/c
(Insurance premium paid in advance)
In financial statements, it is recorded as :
Profit & Loss A/c
Dr. Cr.
Particulars Amount Particulars Amount
` `
Insurance Premium
Less : Prepaid Insurance
premium
Balance Sheet
Liabilities Amount Assets Amount
` `
Prepaid insurance
4. Accrued income (Due but not received)
Accrued income means income earned but not received till the end of the accounting
year. For example, interest on securities or dividends on shares, which has become
due but may be received on a date falling in the next year. Such income does not
appear in the trial balance but should be duly accounted for in the year, because such
income has accrued.
Adjustment entry for the transaction : suppose Rent receivable as it has become due
but is not yet received

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Rent Receivable (accrued) A/c Dr.
To Rent Received A/c
(Amount of rent due but not received)
In financial statements, it will be recorded as;
Profit & Loss A/c
Dr. Cr.
Notes
Particulars Amount Particulars Amount
` `
Rent Received
Add : Rent Accrued
Balance Sheet
Liabilities Amount Assets Amount
` `
Rent Accrued

5. Unearned income/income Received in Advance

Sometimes income is received before it becomes actually due. Such income is called
“unearned income” or “income received in advance”. Since this income does not relate
to the accounting year, it should be deducted from the relevant head of income in the
Profit & Loss A/c. It is a liability and hence is shown in the liability side of the Balance
Sheet. Example of such income is rent that has been received for the months of January
and February of the coming accounting year.
Adjustment entry for the same is
Rent Received A/c Dr
To Rent Received in Advance A/c
(Rent received in advance)
In financial statements
Profit and Loss A/c
Dr. Cr.
Particulars Amount Particulars Amount
` `
Rent Received
Less : Rent received
in advance

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Financial Statement
Balance Sheet
Liabilities Amount Assets Amount
` `
Rent received in advance

INTEXT QUESTIONS 18.2

Notes
Fill in the blanks with suitable terms :
(i) Expenses related to the current accounting period but have not been paid are
known as ...………
(ii) Part of expenses paid if relates to the next accounting year, it is called ...………
(iii) Income earned but not received till the end of the accounting year is termed as
...………
(iv) Income if received before it becomes due is called ...………

18.3 OTHER ADJUSTMENTS

6. Interest on Capital
As per business entity concept capital of the proprietor is a liability for the business.
Like other loans, interest can be allowed on capital also. In case it is decided to allow
interest on capital, adjustment entry will be as follows :
Interest on Capital A/c Dr
To Capital A/c
(Interest allowed on capital)
In financial statements it is shown as under:
Profit & Loss A/c
Dr. Cr.
Particulars Amount Particulars Amount
` `
Interest on capital
Balance Sheet
Liabilities Amount Assets Amount
` `
Capital
Add : Interest on Capital

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7. Interest on Drawings
Interest may also be charged on money withdrawn by the proprietor for personal use.
Following journal entry is made.
Capital A/c Dr.
To Interest on Drawings A/c
(Interest on Drawings charged)
Notes
In financial statements, it will be shown as :
Profit & Loss A/c
Dr. Cr.
Particulars Amount Particulars Amount
` `
Interest on Drawings
Balance Sheet
Liabilities Amount Assets Amount
` `
Capital
Less : Interest on drawings
8. Depreciation
The value of fixed assets such as Plant and Machinery, Furniture and Fixtures, Land &
Building, Motor Vehicles etc. goes on reducing year after year due to wear and tear,
obsolescence or for any other reason.
As the fixed assets are used for earning revenue the amount by which the value of a
fixed asset decreases is an item of expense, similar to other expenses. This is called
depreciation. It should be charged to the Profit and loss Account. The value of such
assets should also be shown in the Balance Sheet at the reduced value by the amount
of depreciation:
The adjustment entry for depreciation will be
Depreciation A/c Dr
To Asset ( by name ) Account
It will be shown in the Profit and Loss A/c and Balance sheet as under :

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Profit & Loss A/c

Dr. Cr.

Particulars Amount Particulars Amount

` `

Depreciation on

Notes Plant & Machinery

Motor Vehicle (etc)

Balance Sheet

Liabilities Amount Assets Amount

` `

Plant & Machinery ........

Less : Depreciation ........ ........

Motor Vehicle ........

Less: Depreciation ........ ........

Note : In case amount of depreciation has been calculated before closing of accounts,
it will appear in the debit column of the Trial Balance. It will be shown only on the debit
of profit & Loss A/c and further adjustment is not required in the Balance Sheet.

9. Further Bad Debts

When the goods are sold on credit basis some of the debtors partly pay the due amount
or do not pay at all. If this amount cannot be recovered it is called bad debts and is a
loss to the firm. This is entered on the debit side of the Profit & loss A/c. But then there
may be amount of bad debt which was not recorded in the books of accounts and
hence did not appear in the Trial Balance. But the same was discovered before preparing
the financial statements. It is called further bad-debts. Following adjustment entry is
made for the same :

Bad Debts A/c Dr.

To Debtors A/c

(Further bad debts recorded)

In Profit and Loss A/c and Balance sheet it is shown as under :

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Financial Statement
Profit & Loss A/c
Dr Cr
Particulars Amount Particulars Amount
` `
Bad Debts
Add Further
Bad debts Notes
Balance Sheet
Liabilities Amount Assets Amount
` `
Sundry Debtors
Less: Further
Bad debts
10. Provision for Bad and Doubtful debts
Some Debts of a particular year may become bad debts in the next year. It means the
loss due to bad debts will be written off in the year it takes place instead of the year it
belongs to. It will be a sound accounting practice that a suitable amount is kept aside in
the current year to meet the possible loss of bad debts in the next year. Decision
regarding maintenance for provision for Bad and Doubtful Debts is taken at the end of
the year so it is an item of adjustment. It is called a provision for Bad and Doubtful
Debt.
The adjustment entry will be as under :
Profit & loss A/c Dr.
To Provision for Doubtful Debts A/c
(Provision for doubtful debts created)
In the Profit and Loss A/c and Balance sheet it will be shown as under:
Profit & Loss A/c
Dr Cr
Particulars Amount Particulars Amount
` `
Bad Debts
Add : Provision for Doubtful
debts

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Financial Statement
Balance Sheet
Liabilities Amount Assets Amount
` `
Debtors
Less : Provision for bad
Debts

Notes Such Provision is created on Debtors at a given rate say 5%. In case there is further
bad debts, provision for bad and doubtful Debts will be calculated on the amount of
debtors after deducting from it the amount of further Bad Debts.
Over the years businessman might have experienced that a certain percentage of the
debts created due to credit sales go bad every year. So a provision for bad and doubtful
debt is made on the debtors of a year at a fixed percentage say 5%. This percentage
may change if the circumstances have changed. For example, it may be reduced if the
businessman has become selective in selling goods on credit.
Provision for bad and doubtful debt is maintained at every year at a fixed percentage of
the debtors. Last year balance is carried forward in the current year. This may be
called old provision for bad and doubtful debts. Current years bad debts or/and further
bad debts is adjusted towards this provision and more provision is created, which may
be called new provision for bad debts.
Arithmatically it is shown in the Profit and Loss A/c as follows :
Profit and Loss A/c
Dr Cr
Particulars Amount Particulars Amount
` `
Bad Debts
Add : Further Bad Debts
Add new provision for Bad
and Doubtful Debts
Less : Old provision for Bad
and Doubtful Debts
In case the balance amount of provision for bad and doubtful debts carried forward
from last year is more than the amount of bad debts, amount of further Bad Debts and
the amount of new provision for bad debts combined together, the excess balance will
be credited to Profit and Loss A/c.

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The amount of provision for Bad and Doubtful Debts is an item of liability. But usual
practice is to show it as deducted from the amount of book debts/sundry debtors on
the assets side of the Balance Sheet.
The above can best be explained by the following example :
Items appearing in the Trial Balance of a sole trader on 31st Dec, 2013.
Dr Cr
Particulars Balance Balance
` ` Notes
Sundry Debtors 24600
Provision for Bad and Doubtful Debts 1000
Bad Debts 700
Additional Information
Further bad debts amounted to ` 600. Make a provision for Bad and Doubtful debts
on Debtors @ 5%.
Show the above items and related adjustments in the financial statements as on that
date.
Proft and Loss A/c
for the year ended 31st Dec., 2013
Dr. Cr.
Particulars Amount Particulars Amount
` `
Bad Debts 700
Further Bad Debts 600
Add : New Provision for bad
and Doubtful Debts 1200
2500
Less : Old provision for bad
and Doubtful Debts (1000) 1500

Balance Sheet
as on 31st Dec., 2013
Liabilities Amount Assets Amount
` `
Sundry Debtors 24600
Less : Further Bad Debts 600
24000
Less : Provision for bad
Debts @ 5% 1200 22800

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18.4 ADJUSTMENTS IN PREPRATIONS OF FINANCIAL
STATEMENTS
11. Provision for Discount on Debtors
Debtors outstanding at the end of year make payment in the next year and they may
be entitled to cash discount if they make the payment by the due date. Because, the
debt has arisen during the year, the discount is to be taken as expense for the year.
Notes Thus a Provision for Discount on Debtors is made.
The process is same as for the provision for doubtful debt. The likely amount of the
discount to be allowed is debited to the Profit and Loss Account and credited to
the Provision for Discount Account. This amount is deducted from book debts
(debtors) in the balance sheet and is carried forward to the next year. Discount allowed
to the existing debtors in the next year are debited to the Provision for Discount
Account and not to the Profit and Loss Account. The debit reduces the balance in
the provision account, it is made up to the required figure by a debit to the Profit
& Loss Account and credit to the provisions account just like the Provision for
Doubtful Debts Account.
An important point to note is that discount is not allowed on debts that became bad.
Therefore, the provision for discount is made for good debts only. In other words,
the amount of the Provision for Discount is calculated after deducting bad debts and
the provision for doubtful debts from sundry debtros. Suppose, sundry debtors total
` 1,00,000; provision for doubtful debts is required at 5% and provision for discounts
at 2.5%. So first we have to calculate provision for doubtful debts i.e. ` 1,00,000
x 5% = ` 5,000; the remaining amount is ` 95,000. Now we calculate Provision
for Discount on Debtors i.e. ` 95,000 x 2.5% it will be ` 2,375.
Accounting Treatment
(i) For Discount Allowed :
Discount Allowed A/c Dr.
To Debtors A/c
(Being discount allowed to debtors)
(ii) For transferring the amount of discount to profit & loss Account.
Profit & Loss A/c Dr.
To Discount Allowed
(Being discount allowed transferred to Profit & Loss A/c)

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(iii) If the existing provision appears in the books, then the discount allowed would
be transferred to the Provision and Discount on Debtors Account instead of the
Profit Loss Account. The entry would be :-
Provision for Discount on Debtors A/c Dr.
To Discount Allowed
(Being discount transferred to Provision for Discount on Debtors A/c)
(iv) For creating Provision for Discount on Debtors : Notes
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c
(Being balance of provision for discount account
being charged to Profit & Loss A/c)
Illustration : 1
The Sundry Debts of a firm on 31st December, 2012 were ` 4,00,000. On that date,
it was decided to create a Provision for Discount at 2% on Sundry Debtors. During
2013 the actual amount of discount allowed was ` 4000. The debtors on 31st
December, 2013 were ` 3,00,000 and it was again decided to create a Provision for
Discount over Debtors at 2%. Pass the Journal entries and prepare Discount Account
and Provision for Discount Account for both the years.
Solution :
Journal
Date Particulars L.F. Dr. (`) Cr. (`)
2012
Dec. 31 Profit and Loss A/c ...Dr. 8,000
To Provision for Discount on Debtors A/c 8,000
(Being provision for discount on debtor credited)
2013
Dec. 31 Discount Allowed A/c ...Dr. 4,000
To Sundry Debtors A/c 4,000
(Being discount allowed on payment received)
Dec. 31 Provision for Discount on Debtors A/c ...Dr. 4,000
To Discount Allowed A/c 4,000
(Being discount transferred to Provision Account)
Dec. 31 Profit and Loss A/c ...Dr. 2,000
To Provision for Discount on Debtors A/c 2,000
(Being provision created)

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Provision for Discount on Debtors Account
Date Particulars J.F. ` Date Particulars J.F. `

2012 2012

Dec. 31 To Balance c/d 8,000 Dec. 31 By Profit and Loss A/c 8,000

2013 2013

Dec. 31 To Discount Allowed A/c 4,000 Jan. 1 By Balance b/d 8,000

Dec. 31 To Balance c/d 6,000 Dec. 31 By Profit and Loss A/c 2,000
Notes
10,000 10,000

2014

Jan. 1 By Balance c/d 6,000

Discount Allowed Account

Date Particulars J.F. ` Date Particulars J.F. `

2013 2013

Dec. 31 To Sundry Debtors A/c 4000 Dec. 31 By Provision for

Discount A/c 4000

12. Manager’s Commission

Sometimes, the manager is entitled to a commission on profits which is usually calculated
as a fixed percentage of the profits. Suppose, the profit earned by the firm is ` 80,000
without considering the commission which is at 5%. The commission will be then
` 4,000. The profit will be reduced to ` 76,000. As the amount of commission ` 4,000
is still to be paid, it should be treated as an outstanding expense. Accordingly, the entry
is:
Profit and Loss A/c ...Dr.
To Commission Payable or Outstanding Commission A/c
Commission Payable is a current liability and is shown in the Balance Sheet.
Sometimes, however, the commission is calculated on profits remaining finally after the
commission. If the rate of the commission is 5%, and the profit remaining after the
commission is ` 100; then the profit before the commission will be ` 105. That is in this
case the commission of ` 5 should be out of every ` 105 of profit before the commission.
The formula to calculate the commission in such a case is :

Percentage of the commission

x Net Profit before charging the Commission
100 + Percentage of the commission

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If the profit before commission is ` 8,00,000 and the manager is entitled to a commission
of 5% after deducting the commission, the amount will be ` 38,095, ` 8,00,000 of
5/105. This comission amount can be verified too. The profit after the commission is
` 7,61,905 and ` 38,095 is 5% of this figure. One can see that if we calculate it at 5%
of ` 8,00,000 will be wrong since ` 40,000 is not 5% of ` 7,60,000.
Illustration : 2
The net profit of a firm amount to ` 1,05,000 before charging commission. The manager Notes
of the firm is entitled to a commission of Rs. 5% on the net profit. Calculate the comission
payable to the manager under the following alternative cases :-
I. If the manager is allowed commission on the net profit before charging such
commission, and
II. If the manager is allowed commission on the net profit after charging such
commission. Also show the treatment in the final account ending on 31st March
2013.
Solution :
I Case
[Commission allowed on the net profit before charging such commission]

Commission = Net Profit before charging the Commission x % of Commission

100
5 =
= ` 1,05,000 x ` 5,250
100

Profit & Loss Account

for the year ended 31st March 2013
Particulars ` Particulars `
To Managers Commision 5,250
Balance Sheet
as at 31st March 2013
Liabilities ` Assets `
Current Liabilities
Manager’s Com. Outstanding 5,250
II Case
[Commission allowed on the net profit after charging such commission]
5
Commission = Net Profit before charging the Commission x
105

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5 =
= ` 1,05,000 x ` 5,000
105

Profit & Loss Account

for the year ended 31st March 2013
Particulars ` Particulars `
To Managers Commision 5,000
Notes Balance Sheet
as at 31st March 2013
Liabilities ` Assets `
Current Liabilities
Manager’s Com. Outstanding 5,000

INTEXT QUESTIONS 18.3

I. Give exact term for the following:
(i) Provision against amount due from debtors.
(ii) Fall in the value of fixed assets due to wear and tear.
(iii) Debts which can not be recovered.
(iv) Stock of goods remaining unsold at the end of year.
II. Complete the journal entries for the following adjustments
(i) Interest on capital allowed
Interest on capital A/c Dr
To ……………..
(ii) Wages Outstanding
Wages A/c
To ………..
(iii) Insurance Premium paid for six months in advance
Unexpired Insurance A/c
To …………
(iv) Commission received but not yet earned
Commission A/c
To ………………..

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III. State whether the following statements are True or False :
(i) Provision for discount on debtors is shown on the credit side of Profit &
Loss A/c.
(ii) The Amount of Provision for discount on debtors is deducted from debtors.
(iii) Provision for discount on debtors is a income for a business.
(iv) Provision for discount on debtors is an asset for a company.
(v) If sundry debtors are of ` 10,000 and company creates provision for discount Notes
on debtors @ 10%. Then total provision is ` 1,000.
IV. Fill in the blanks with appropriate words :
(i) Manager’s commission is shown in the ________ side of Profit & Loss A/c
(ii) Manager’s commission is shown in the ___________ of Balance Sheet.
Illustration : 3
From the following Trial Balance of M.B. Garments as on 31st December, 2013, prepare
Trading A/c and Profit & Loss A/c for the year ended 31st December, 2013 and Balance
Sheet as on that date :
Name of the Account Dr. Amount Cr. Amount
` `
Capital 80,000
Cash in hand 570
Cash at bank 5,600
Purchases 43,200
Sales 78,000
Wages 10,400
Power 4,730
Carriage inward 2,040
Carriage outward 3,200
Stock (1.1.2006) 5,660
Land & Building 40,000
Machinery 20,000
Salaries 4,000

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Insurance 600
Sundry Debtors 28,000
Sundry Creditors 10,000
1,68,000 1,68,000
Following adjustments are to be accounted for:

Notes (i) Stock on 31.12.2013 ` 10000.

(ii) Machinery to be depreciated @10% p.a. and Building to be depreciated @ 2%
p.a.
(iii) Salaries for the month of December outstanding were ` 1200.
(iv) Insurance Premium was paid for one year ending 30th June, 2014.

Make journal entries for the adjustments and prepare Trading and Profit & loss A/c
and the Balance Sheet.

Solution

Dr. Cr.
Date Particulars Amount Amount
` `

2013

Dec 31 Closing stock A/c ...Dr 10,000

To Trading A/c 10,000
(Closing stock taken to Trading A/c)

Dec 31 Depreciation A/c ...Dr. 2,800

To Machinery A/c 2,000
To Land & Building A/c 800
(Depreciation on machinery @ 10% p.a. and on
land & Building @ 2% p.a.charged)

Dec 31 Salaries A/c ...Dr. 1,200

To Salary Outstanding A/c 1,200
(Salary due but not paid for December 2013)

Dec 31 Prepaid Insurance A/c ...Dr. 300

To Insurance A/c 300
(Insurance paid in advance accounted for)

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Financial Statement
Trading A/c
for the year ended 31st Dec, 2013
Dr. Cr.
Particulars Amount Particulars Amount
` `
Stock 5,660 Sales 78,000
Purchases 43,200 Closing stock 10,000
Wages 10,400 Notes
Power 4,730
Carriage Inward 2,040
Gross Profit transferred to
Profit & Loss A/c 21,970

88,000 88,000

Profit & Loss A/c

for the year ended 31st Dec. 2013
Dr. Cr.

Particulars Amount Particulars Amount

` `
Carriage outward 3,200 Gross Profit transferred from
Salaries 4,000 Trading A/c 21,970
Add : Salary Outstanding 1,200 5,200
Insurance 600
Less : Prepaid insurance
Depreciation on 300 300
Machinery 2000
Land & building 800 2,800
Net Profit transferred
to capital A/c 10,470

21,970 21,970

Balance Sheet
as at 31st Dec. 2013
Liabilities Amount Assets Amount
` `
Salary Outstanding 1,200 Cash in hand 570
Sundry Creditors 10,000 Cash at Bank 5,600

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 MODULE - 3 Financial Statements : II
Financial Statement
Capital 80,000 Sundry debtors 28,000
Add: net profit 10,470 90,470 Closing stock 10,000
Prepaid Insurance 300
Land & Building 40,000
Less depreciation 800 39,200
Machinery 20,000
Less depreciation 2,000 18,000
Notes
1,01,670 1,01,670

Illustration : 4
From the following Trial Balance of Mustafa & Co., prepare Trading and Profit and
loss A/c for the year ending on 31st Dec. 2013 and Balance Sheet as on that date after
making necessary journal entries for adjustments.
Dr. Cr.
Balance Balance
(`) (` )
Land and Building 60,000 Capital 1,50,000
Plant and Machinery 40,000 Sundry Creditors 30,000
Bill Receivables 8,000 Sales 1,20,000
Stock on 1.1.2013 40,000 Reserve for Bad 4,500
Purchases 51,000 and Doubtful Debts
Wages 20,000 Loan (12% p.a.) 10,000
Coal, Gas & Coke 5,800 Commission Received 2,000
Salaries 5,000
Rent 2,800
Cash at bank 25,000
Sundry Debtors 45,000
Repairs 1,800
Bad Debts 5,500
Sales Returns 2,000
Furniture and Fixture 4,000
Interest on Loan 600
3,16,500 3,16,500

116 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Adjustments
1. Closing stock was valued at ` 30000.
2. Depreciate Plant & Machinery @ 5% and Furniture & Fixture @ 10%.
3. Provide for Bad and Doubtful Debts @ 5%.
4. Outstanding Wages ` 1000, Rent ` 500 and interest on loan outstandin ` 600.
5. Commission accrued ` 1000.
Solution. Notes
Adjustment Entries
Date Particulars Amount Amount
` `
2013
Dec 31 Closing Stock A/c Dr. 30,000
To Trading A/c 30,000
(Closing stock taken into account)
Depreciation A/c Dr. 2400
To Plant & Machinery 2000
To Furniture & Fixture 400
(Depreciation charged @ 5% on Plant
& Machinery & @10% on Furniture)
Profit & loss A/c Dr. 2250
To Reserve for Doubtful Debts 2250
(Reserve for Doubtful Debts created)
Wages A/c Dr 1000
Rent A/c Dr 500
To Outstanding Expenses A/c 1500
(Outstanding expenses provided for)
Commission Accrued A/c Dr. 1000
To commission received 1000
(Commission accrued taken into
consideration)
Interest on loan A/c Dr 600
To Interest on loan Outstanding A/c 600
(Interest on loan due but not paid)

Accountancy 117
 MODULE - 3 Financial Statements : II
Financial Statement
Trading and Profit & Loss A/c of M/s Mustafa & Co.
for the year ended on 31.12.2013
Dr. Cr.
Particulars ` Particulars `
Opening Stock 40,000 Sales 1,20,000
Purchases 51,000 Less : Sales Returns 2,000 1,18,000
Wages 20,000 Closing Stock 30,000
Notes Add : Outstanding 1,000 21,000
Coal, Gas & Coke 5,800
Gross Profit c/d 30,200
1,48,000 1,48,000

Salaries 5,000 Gross Profit b/d 30,200

Rent 2,800 Commission Received
Add : Outstanding 500 3,300 Received 2,000
Repairs 1,800 Add : Accrued
Bad Debts 5,500 Commission 1,000 3,000
Add : New Reserve 2,250
7,750
Less : Old Reserve 4,500 3,250
Interest on Loan 600
Add : Interest Outstanding 600 1,200
Depreciation
Plant & Machinery 2,000
Furniture & Fixture 400 2,400
Net Profit Transferred to
Capital A/c 16,250

33,200 33,200

Balance sheet of M/s Mustafa & Co.

as at 31.12. 2013
Liabilities ` Assets `
Sundry creditors 30,000 Cash in Bank 25,000
Loan 10,000 Bill Receivables 8,000
Interest outstanding 600 Sundry Debtors 45,000
Outstanding Expenses : Less : Reserve for
Wages 1,000 Doubtful Debts 2,250 42,750
Rent 500 1,500 Closing Stock 30,000

118 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Capital 1,50,000 Furniture & Fixture 4,000
Add : Net Profit 16,250 1,66,250 Less : Dep. 400 3,600
Plant & Machinery 40,000
Less : Dep. 2,000 38,000
Land & Building 60,000
Commission Accrued 1,000
2,08,350 2,08,350
Notes
Illustration : 5
From the following balances of the year ending 31st December, 2013 and additional
information prepare the Trading and Profit and Loss Account and the Balance Sheet of
M/s Kanohal and Sons.
` `
Capital 80,000 Insurance 600
Purchases 82,000 Salaries 12,500
Sales 1,10,000 Bad Debts 200
Return Outwards 1,000 Carriage on Purchase 200
Buildings 45,000 Commission (Cr.) 1,500
Opening Stock 15,000 Cash in Hand 5,000
Debtors 20,100 Cash at Bank 25,000
Creditors 28,000 Sales Tax Paid 5,000
Furniture 7,000 Sales Tax Collected 3,500
Wages 1,800 Interest on Investments 500
Rent 5,100
Additional Information:
(a) Closing Stock was valued at ` 20,000.
(b) Provide Depreciation on building @5% and on furniture @10%.
(c) Outstanding salaries ` 1,000.
(d) Unexpired insurance ` 50.
(e) Accrued commission ` 300
(f) Provide for Manager’s Commission at 5% on net profit after charging such
commision.

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 MODULE - 3 Financial Statements : II
Financial Statement
Solution :
Trading and Profit & Loss Account
for the ended 31st December, 2013
Dr. Cr.
Particulars ` Particulars `
To Opening Stock 15,000 By Sales 1,10,000
To Purchases 82,000 By Closing Stock 20,000
Notes
Less : Return Outward 1,000 81,000
To Wages 1,800
To Carriage on Purchases 200
To Gross Profit c/d 32,000
1,30,000 1,30,000
To Rent 5,100 By Gross Profit b/d 32,000
To Insurance 600 By Interest on Investment 500
Less : Unexpired Insurance 50 550 By Commission 1,500
To Salaries 12,500 Add : Accrued
Add : Outstanding Commission 300 1,800
Salaries 1,000 13,500
To Bad Debts 200
To Depreciation on :
Building 2,250
Furniture 700 2,950
To Net Profit before
Manager’s Commission 12,000
34,300 34,300
To Manager’s Commission By Net Profit before
(5/105 x 12,000) 571 Manager’s Commission 12,000
To Net Profit after Manager
Commission 11,429
12,000 12,000

Balance Sheet
as at 31st December, 2013
Liabilities ` Assets `
Creditors 28,000 Cash in Hand 5,000
Outstanding Salary 1,000 Cash at Bank 25,000
Manager’s Commission 571 Closing Stock 20,000

120 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Capital 80,000 Debtors 20,100
Add : Net Profit 11,429 91,429 Advance Sales Tax Paid
(Sales Tax Paid - Sales Tax Collected) 1,500
Accrued Commission 300
Prepaid Insurance 50
Building 45,000
Less : Depreciation 2,250 42,750
Furniture 7,000 Notes
Less : Depreciation 700 6,300

1,21,000 1,21,000

13. Abnormal Losses

Such losses occur because of fire, earthquakes or accidents. These may destroy some
fixed assets of the firm. In such case an Asset Account is credited and the Profit and
Loss Account is debited. The debit may be spread over two or three years.
Stock of goods may also be destroyed or damaged by fire, or other causes. It is
obvious that because of this, the value of the stock will be lower than otherwise. This
will reduce the amount of gross and net profit. It is, however, better to ascertain the
gross profit which would have been earned without the loss since this enables the firm
to judge its trading operations properly. To nullify the effect of loss of stock, the Trading
Account is credited with the cost of the goods destroyed. If the goods destroyed are
not insured then the cost price of the goods destroyed is debited to Profit and Loss
Account. If the goods are insured, then the claim admitted by the insurance company is
deducted and the claim not admitted is debited to the Profit and Loss Account. The
adjusting entries are as follows :
(i) Accidental Loss of Stock A/c
or Loss by Fire ...Dr. [Total Value of Abnormal Loss]
To Trading A/c
(ii) Insurance Claim or Insurance Co. ...Dr. [Amount of Insurance Claim]
Profit and Loss A/c ...Dr. [Value of Irrecovered Loss]
To Accidental Loss of Stock A/c [Total Value of Abnormal Loss]
Insurance Company’s Account will be shown as an asset in Balance Sheet
Note : If stock is not insured, following entry will be passed.
Profit and Loss A/c ...Dr. [Total Value of Abnormal Loss]
To Trading A/c

Accountancy 121
 MODULE - 3 Financial Statements : II
Financial Statement
Illustration : 6
On 31st Dec. 2013, stocks worth ` 4,00,000 were destroyed by fire. The stock was
insured and the insurance company admitted the claim of ` 3,00,000 only. Give the
necessary journal entries and show how it will be treated in the Final Accounts.
Solution :
Journal

Notes Date Particulars LF. Dr. (`) Cr. (`)

2013
Dec. 31 Loss by Fire A/c Dr. 4,00,000
To Trading A/c 4,00,000
(Being loss of stock by fire)
Mar. 31 Insurance Co. Dr. 3,00,000
P & L A/c Dr. 1,00,000
To Loss by fire A/c 4,00,000
(Being insurance co. admitted
a partial claim only)
Trading Account
for the year ended 31st Dec. 2013
Dr. Cr.
Particulars ` Particulars `

By Loss by Fire A/c 4,00,000

Profit and Loss Account

for the year ended 31st Dec. 2013
Dr. Cr.
Particulars ` Particulars `

To Loss by fire 4,00,000

Less : Ins. Claim 3,00,000 1,00,000

Balance Sheet
as at 31st Dec. 2013
Liabilities ` Asset `
Current Assets

Claim due from Insurance Co. 3,00,000

122 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Illustration : 7
From the following Ledger balances of Mr. Ghanshyam, prepare the Trading and Profit
and Loss Account for the year ended 31st March 2013 and the Balance Sheet as on
that date after making the necessary adjustments.
Particulars ` Particulars `
Trade Expenses 8,000 Purchases 8,20,000
Freight and Duty 20,000 Stock on (1.4.2012) 1,50,000
Carriage Outwards 5,000 Plant and Machinery (1.4.2012) 2,00,000
Notes
Sundry Debtors 2,06,000 Pland and Machinery (additions
Furniture and Fixtures 50,000 on 1.10.2012) 50,000
Return Inwards 20,000 Drawings 60,000
Printing and Stationery 4,000 Capital 8,00,000
Rent, Rates and Taxes 46,000 Reserve for Doubtful Debts 8,000
Sundry Creditors 1,00,000 Rent for Premises Sublet 16,000
Sales 12,00,000 Insurance Charges 7,000
Return Outwards 10,000 Salaries and wages 2,13,000
Postage and Telegraphs 8,000 Cash in Hand 62,000
Cash at Bank 2,05,000

Adjustments :
(i) Stock on 31st March 2013 was ` 1,40,000.
(ii) Write off ` 6,000 as Bad Debts.
(iii) Provision for Doubtful Debts is to be maintained @5%.
(iv) Provide Depreciation on furniture and fixtures at 5% p.a. and on plant and
machinery at 20% p.a.
(v) Insurance prepaid was ` 1,000.
(vi) A fire occurred in the godown and stock of the value of ` 50,000 was destroyed.
It was insured and the insurance company admitted full claim.
Solution :
Trading and Profit and Loss Account
for the year ended 31st March, 2013
Dr. Cr.
Particulars ` Particulars `
To Opening Stock 1,50,000 By Sales 12,00,000
To Purchases 8,20,000 Less : Return Inwards 20,000 11,80,000
Less : Return Outwards 10,000 8,10,000 By Loss of Stock by Fire A/c 50,000
To Freight and Duty 20,000 By Closing Stock 1,40,000
To Gross Profit c/d 3,90,000
13,70,000 13,70,000

Accountancy 123
 MODULE - 3 Financial Statements : II
Financial Statement
To Trade Expenses 8,000 By Gross Profit b/d 3,90,000
To Carriage Outwards 5,000 By Rent for Premises 16,000
To Depreciation on Furniture
and Fixtures 2,500
To Dep. on Plant and Machinery
2,00,000 x 20/100 40,000
5,000 x 20/100 x 6/12 5,000 45,000
To Printing & Stationery 4,000
Notes To Rent, Rates and Taxes 46,000
To Insurance 7,000
Less : Prepaid 1,000 6,000
To Salaries and Wages 2,13,000
To Postage and Telegraphs 8,000
To Provision for Doubtful
Debts (Closing)
(` 2,00,000 x 5/100) 10,000
Add : Bad Debts 6,000
16,000
Less: Provison for Doubtful
Debts (Opening) 8,000 8,000
To Net Profit transferred
to Capital A/c 60,500
4,06,000 4,06,000

Balance Sheet
as at 31st March, 2013
Libilities ` Assets `
Current Liabilities Current Assets
Sundry Creditors 1,00,000 Cash in Hand 62,000
Capital Cash at Bank 2,05,000
Opening Balance 8,00,000 Sundry Debtors 2,06,000
Add: Net Profit 60,500 Less: Further Bad Debts 6,000
8,60,500 2,00,000
Less: Drawings 60,000 8,00,500 Less: Provision for
Doubtful Debts 10,000 1,90,000
Closing Stock 1,40,000
Insurance Claim 50,000
Prepaid Insurance 1,000
Fixed Assets
Furniture and Fixture 50,000
Less: Depreciation 2,500 47,500

124 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Plant and Machinery 2,50,000
Less: Depreciation 45,000 2,05,000
9,00,500 9,00,500

14. Drawings of Goods by the Proprietor

When the proprietor draws some goods or cash from the business for his/her personal
use, it is a drawing.
Now, if you find that this has not been recorded in the books, you have to make the
Notes
necessary adjustments to take it into the Final Accounts. Then the treatment of such
drawings of goods by the proprietor in the Final Account is as follows:
i. Deduct it from purchases on the debit side of Trading A/c.
ii. Deduct it either from the capital or add to drawings on the liability side of the
Balance Sheet.
Accounting Treatment of Drawings
I. Drawing made in cash
(i) Drawings A/c Dr.
To Cash/Bank A/c
(Being cash withdrawn for personal use)
(ii) Capital A/c Dr.
To Drawings A/c
(Being drawings transferred)
II. Withdrawal of Goods by the Proprietor
(i) Drawings A/c Dr.
To Purchases A/c
(Being goods withdrawn for personal use)
(ii) Capital A/c Dr.
To Drawings A/c
(Being drawings transferred)
III. Income Tax Paid by sole proprietor out of the entity’s (business) cash
(i) Income Tax A/c Dr.
To Cash/Bank A/c
(Being Income Tax Paid)

Accountancy 125
 MODULE - 3 Financial Statements : II
Financial Statement
(ii) Drawings A/c Dr.
To Income Tax
(Being Income Tax Transferred)
(iii) Capital A/c Dr.
To Drawings
(Being drawings transferred)
Notes
15. Goods Distributed as Free Samples
For sales promotion, some of the goods may be distributed as free samples. For example,
if goods worth ` 10,000 are distributed as free samples then it will be an advertisement
for the concern but on the other hand the stocks will be less by goods of such value. In
order to bring this into the books of accounts the following entry is passed :
Advertisement A/c Dr.
To Purchases A/c
(Being goods distributed as free samples)
The two-hold effect of this entry will be :
i. It is shown on the credit side of Trading A/c, or deducted from the purchases.
ii. It is shown on the debit side of the profit and loss A/c as advertisement expenses.
Illustration : 8
From the following Trail Balance, Prepare the Trading and Profit & Loss A/c for the
year ended March 31, 2014 and the balance sheet as on that date :
Debit Balance ` Credit Balance `
Salaries 10,600 Sales 66,420
Bills Receivable 6,000 Capital 50,000
Investments 40,000 Pro. for Doubtful Debts. 2,500
Furniture 12,000 10% Loan (1.10.2013) 10,000
Opening Stock 4,500 Discount Received 400
Purchases 30,000 Sundry Creditors 9,300
Sundry Debtors 20,000 Bills Payable 5,000
Interest on Loan 400 Outstanding Salaries 500
Insurance Premium 900 Bad Debts Recovered 200
Wages 4,600 Interest on Investments 2,000

126 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Rent 1,520 Trading Commission 7,000
Bad Debts 1,200
Carriage Outwards 600
Cash at Bank 10,000
Depreciation on Furniture 2,500
Accrued Commission 1,000
Notes
Advertisement 7,500
1,53,320 1,53,320
Adjustments :
i. Closing Stock - ` 6,000.
ii. Goods costing ` 1,000 were distributed as free samples while goods costing
` 500 were taken by the proprietor for personal use.
iii. A credit sale of ` 2,000 was not recorded in the sales book.
iv. Closing Stock included goods costing ` 1,000 which were sold and recorded as
sales but not delivered to the customer.
v. Maintain provision for Doubtful Debts @5%.
vi. Only one-third advertising expenses are to be written off.
Solution
Trading and Profit & Loss Account
for the year ending 31st March, 2014
Dr. Cr.
Particulars ` Particulars `
To Opening Stock 4,500 By Sales 66,420
To Purchases 30,000 Add : Credit Sales 2,000 68,420
Less: Free Samples 1,000 By Closing Stock 6,000
29,000 Less: Cost of Goods sold
Less : Drawing of Goods 500 28,500 but not delivered 1,000 5,000
To Wages 4,600
To Gross Profit c/d 35,820
73,420 73,420
To Salaries 10,600 By Gross Profit b/d 35,820
To Interest on Loan 400 By Old Pro. for Bad Debts 2,500
Add: Outstanding Interest Less: Bad Debts 1,200
on Loan 100 500 1,300
To Insurance Premium 900 Less : New Provision 1,100 200

Accountancy 127
 MODULE - 3 Financial Statements : II
Financial Statement
To Rent 1,520 By Discount Received 400
To Carriage Outwards 600 By Bad Debts Recovered 200
To Depreciation of Furniture 2,500 By Interest on Investment 2,000
To Advertisement 2,500 By Trading Commission 7,000
To Free Samples 1,000
To Net Profit transferred to
Capital A/c 25,500
45,620 45,620
Notes
Balance Sheet
as at 31st March, 2013
Liabilities ` Assets `
Capital 50,000 Bill Receivable 6,000
Add: Net Profit 25,500 Investments 40,000
75,500 Furniture 12,000
Less: Drawings 500 75,000 Debtors 20,000
10% Loan 10,000 Add: Credit Sales Not
Outstanding Interest on Loan 100 Recorded 2,000
Creditors 9,300 22,000
Bills Payable 5,000 Less: New Provision 1,100 20,900
Outstanding Salaries 500 Accrued Commission 1,000
Closing Stock 5,000
Bank 10,000
Unexpired Advertisement Exp. 5,000
99,900 99,900

Summarised view of Adjustment Entries

Adjustment Adjustment entry Treatment in Trading Treatment in
and Profit & Balance Sheet
Loss A/c
1. Closing stock Closing stock A/c Dr Shown on the credit Shown on the
To Trading A/c side of Trading A/c Assets side

2. Outstanding Expenses A/c Dr Added to respective Shown on the

expenses To Outstanding expenses on the liabilities side
expenses A/c debit side

3. Prepaid Prepaid expenses A/c Dr Deducted from the Shown on the

expenses To Expenses A/c respective expenses Assets side
on the debit side

4. Accrued Accrued income A/c Dr Added to the Shown on the

income To Income A/c respective income Assets side
on the credit side

128 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
5. Income Income A/c Dr Deducted from the Shownn on the
received in To income received respective income liabilities side
advance in advance A/c on the credit side

6. Interest on Interest on capital A/c Dr Shown on the debit Shown as

capital To capital A/c side of P&L A/c addition to
capital on
liabilities side

7. Interest Capital A/c Dr Shown on the Shown as

on drawings To interest on credit side P&L A/c deduction to Notes
drawing A/c capital on
liabilities side

8. Depreciation Depreciation A/c Dr Shown on the Deducted from

To Assets A/c debit side P&L A/c the value of
Assets

9. Further Bad Debts A/c Dr Shown on the Deducted from

bad debts To Debtors A/c debit side P&L A/c debtors, shown
on Assets side

10. Provision for Profit & Loss A/c Dr Shown on the Shown as
bad and To Provision for bad debit side P&L A/c deduction from
doubtful debts and doubtful debts debtors on
Assets side.

11. Provision for Profit & Loss A/c Dr. Shown on the debit Shown as
Discount on To Provision for side P&L A/c deduction from
Debtors Discount debtors on
Assets side.

12. Commission to Profit & Loss A/c Dr. Shown on the debit Shown in
Manager To Manager’s side P&L A/c liability side
Commission

13. Extra Ordinary Profit & Loss A/c Dr. Shown on the debit Shown as
Loss To Extra Ordinary side P&L A/c deduction from
Loss concerned
Asset on
Assets side.

14. Drawings of Drawings A/c Dr. To be deducted from Shown as

goods by the To Purchases A/c purchases. deduction from
Owner Capital on
Liabilities side.

15. Distribution of Advertisement A/c Dr. To be deducted from Shown on

goods as free To Purchases A/c purchases. debit side of
samples P & L A/c

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 MODULE - 3 Financial Statements : II
Financial Statement

INTEXT QUESTIONS 18.4

State whether the following statements are True or False :
i. Proprietor draws some goods or cash from the business is a drawing.
ii. If proprietor draws goods then it will be deducted from purchases.
iii. Drawing is an asset.
Notes iv. Good distributed as free samples is advertisement for the business.
v. Goods distributed as free sample is shown on the debit side of trading A/c.

WHAT YOU HAVE LEARNT

z Adjustments are needed to be accounted for so that Income Statement and Position
Statement show the correct profit or loss and financial position.
z There can be items of income and expenditure which do not pertain to the
accounting year for which financial statements are being prepared. These are to
be excluded. These are called prepaid items.
z There can be items of expenses and income which are left out and are to be
accounted, which are called outstanding expenses or accrued incomes.
z Other important adjustments to be carried out are Closing Stock, Depreciation
on fixed assets, interest on capital and interest on Drawings.
z There may be further bad debts and provision for bad and doubtful debts need to
be made on debtors.
z Further bad debts are irrecoverable debts in addition to what has been shown in
the Trial Balance as bad debts
z Provision for bad and doubtful debts is created for future payments due from
debtors but seems to be irrecoverable. It is created on the basis of past experiences.
z The Process of creating provision for discount on debtors is same as provision for
doubtful debts. The likely amount of the discount to be allowed is debited to the
P&L A/c and the same will be deducted from debtors in the balance sheet.
z If the manager is allowed commission on the net profit before charging such
commission then the following formula should be used :
% of commission
Net Profit x
100
and if the manager is entitled for commission. On the net profit after charging such
commission then the following formula should be used :

130 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Net Profit x % of commission
(100 + % of commission)
z Abnormal losses occur because of fire, earthquakes or accidents. These may
destroy some fixed assets of the firm. In such case an Asset Account is credited to
trading A/c and debited to profit and loss A/c debited.
z Drawings of goods by the propriter is deducted from purchases on the debit side
of Trading A/c., and deducted from capital in Balance Shet.
z Goods distributed as free sample is duducted from purchases and shown in the Notes
debit side of P&L A/c as advertisement.

TERMINAL EXERCISE
1. Answer the following questions in brief.
(a) Why are adjustments needed?
(b) Why are outstanding expenses treated as liabilities?
(c) What is the difference between accrued income and unearned income?
2. Pass necessary journal entries for following adjustments :
i. Wages outstanding
ii. Depreciation on Furniture
iii. Interest on Investment accrued but not received
iv. Insurance Premium paid in advance
3. Why reserve is created for doubtful debts?
4. From the following trial balance of M/s V.B. Fertilizers prepare Trading & Profit
and Loss Account for the year ending 31st December, 2013 and Balance Sheet as
on that date. Also pass Journal entries for the adjustments:
Particulars Dr. (`) Particulars Cr (`)
Stock (1.1.2013) 13,800 Capital 65,000
Purchases 52,000 Bills payable 18,000
Wages 4,000 Sales 74,400
Return inward 2,400 Return outward 1,500
Land & Building 40,000 Discount 450
Plant & machinery 24,500 Creditors 6,500
Bills receivable 12,000 Interest 600
Debtors 5,500 Bad debts Reserve 250

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 MODULE - 3 Financial Statements : II
Financial Statement
Cash in hand & at Bank 8,750 Loan 8,000
Rent (office) 2,200 Commission 700
Bad Debts 400
Insurance 1,500
Freight inward 1,400
Fuel & Power 2,450
Furniture 4,500
Notes
1,75,400 1,75,400
Adjustments
i. Stock on 31.12.2013 ` 25,000.
ii. Write off depreciation on furniture 10% and on plant & machinery 20%.
iii. Provide for wages outstanding `650 and rent outstanding
` 200. Prepaid insurance amounted to ` 300.
iv. Further bad debts amounted to ` 100. Make a provision for bad & doubtful
debts @ 5% on debtors.
v. Interest on capital to be allowed @ 6%.
5. On 1st April, 2013 reserve for Bad Debts shows a balance of ` 3,200 Bad debts
during the year as per ledger were ` 2,100. Debtors amounted to `7,000. After
closing of the ledger, it was found that there were bad debts of ` 800. It was
decided to create a reserve for doubtful debts on creditors @6%.
Pass necessary journal entries and show the items in Profit & Loss account and
Balance Sheet.
6. From the following trial balance of Pranaya as at 31st December, 2014, prepare
Trading and Profit & loss account for the year ended 31st December, 2014 and a
Balance Sheet as on that date after making necessary adjustments. Also Give
journal entries for these adjustments
Trial Balance
as at 31-12-2014
Name of Account Dr. Balances Dr. Balances
(`) (`)
Pranaya’s Capital Account 1,00,000
Drawings 24,000 –
Plant and Machinery 45,000 –
Stock (1st Jan, 2014) 15,000 –
Purchases 85,000 –
Return inwards 5,000 –
Sundry Debtors 24,600 –

132 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
Freight and duty 2,000 –
Carriage outwards 1,600 –
Rent Rates & Taxes 3,800 –
Sundry Creditors – 22,000
Postage & Courier Expenses 1,800
Sales – 1,35,000
Provision for Bad Debts – 600
Discount – 800
Insurance Premium 900 – Notes
Wages 23,000 –
Cash in Hand 6,200 –
Cash at Bank 20,500 –
2,58,400 2,58,400
Adjustments
i. Stock on 31st December, 2014 was valued at ` 24,000.
ii. Write off ` 600 as bad debts.
iii. Provision for doubtful debts is to be maintained at 5% on sundry debtors.
iv. Provide depreciation on plant and machinery at 20%. A machine costing `
1,500 was purchased on 1st July, 2014.
v. Wages outstanding amounted to ` 1,500, and Insurance Prepaid was ` 250.
7. The following are the balances extracted from the books of Chinmay Aggarwal
on 31st March 2014.
` `
Chinmay’s Capital 60,000 Stock (1.4.2013) 44,200
Furniture & Fixtures 5,000 Debtors 36,000
Bank Overdraft 8,400 Rent received 2,000
Creditors 27,600 Purchases 2,20,000
Business Premises 50,000 Sales 3,00,000
Discount (Dr) 3,200 Sales Returns 4,000
Tax & Insurance 4,000 Bills Payable 10,000
Salaries 20,000
Commission (Cr.) 2,000
Carriage inward 3,600
Bad Debts 1,600
Motor Vehicle 14,400
Investments 4,000
Following adjustments are to be made :
(i) Stock on 31 March, 2014 ` 35,000.

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Financial Statement
(ii) Write off depreciation on :
Business Premises ` 800
Furniture & Fixture ` 500
Motor Vehicle 10% p.a.
(iii) Interest on bank overdraft ` 150.
(iv) Interest on capital was to be allowed @ 6% p.a.
Notes
(v) Make a provision of 5% on debtors for doubtful debts.
(vi) Carry forward ` 500 for unexpired insurance.
Prepare Trading and Profit & loss A/c for the year ended 31st March, 2014 and
Balance Sheet as on that date.
8. Pass necessary journal entries for the following adjustments :
i. 1/3 rd of the total commission received during the year of
`12000 relates to the next year
ii. Insurance premium of Rs.8000 is paid for the year ending 30st June. Accounts
are closed on 31st March every year.
iii. Interest on drawing is charged for the year amounting to ` 450.
9. Explain the following adjustments with examples :
i. Provision for discount on debtors.
ii. Manager’s Commission
10. What do you mean by Abnormal loss? Also explain its accounting treatment with
the help of an example.
11. Explain the accounting treatment of drawing of goods by the proprietor and goods
distributed as free samples.

ANSWERS TO INTEXT QUESTIONS

18.1 (i) profit, loss (ii) profit or loss, financial position
(iii) excluded (iv) accounted for
18.2 (i) Outstanding expenses (ii) Prepaid expenses
(iii) Accrued income (iv) Income received in advance
18.3 I. (i) provision for bad & doubtful debts
(ii) depreciation (iii) bad debts (iv) closing stock

134 Accountancy
 Financial Statements : II MODULE - 3
Financial Statement
II. (i) To capital account (ii) To wages outstanding A/c
(iii) To insurance premium A/c
(iv) To commission received in advance A/c
III. (i) False (ii) True(iii) False (iv) False (v) True
IV. (i) Debit (ii) Liability
18.4 (i) True (ii) True (iii) False (iv) True (v) False
Notes

ANSWERS TO TERMINAL EXERCISE

4. (G.P. ` 24200; N.P. ` 12580
Total of Balance Sheet ` 114830
6. G.P. ` 27500; N.P. ` 10400
Total Balance Sheet ` 109900
7. G.P. ` 63200; N.P. ` 30610
Total balance Sheet : ` 140360

ACTIVITY
Analyse the financial statements of at least four business concerns and record the rate
at which depreciaiton is charged on various fixed assets and provision is made for
doubtful debts and find out the reasons of variation.
S.No. Name of Business Rate of Reasons of
concern Depreciation variation

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