Keac 210

372
Accountancy
Financial Statements - II
10
I
L EARNING O BJECTIVES
After studying this chapter,
you will be able to :
describe the need for
adjustments while
preparing the financial
statements;
explain the accounting
treatment of adjustments for outstanding
and prepaid expenses,
accrued and advance
receipts of incomes;
discuss the adjustments to be made
regarding depreciation, bad debts, provision for doubtful debts,
provision for discount
on debtors;
explain the concepts
and adjustment of
managers commission
and interest on capital;
prepare profit and loss
account and balance
sheet with adjustments.
n chapter 9, you learnt about the preparation of

simple final accounts in the format of trading and
profit and loss account and balance sheet. The
preparation of simple final accounts pre-supposes
the absence of any accounting complexities which
are normal to business operations. These
complexities arise due to the fact that the process
of determining income and financial position is
based on the accrual basis of accounting. This
emphasises that while ascertaining the profitability,
the revenues be considered on earned basis and
not on receipt basis, and the expenses be considered
on incurred basis and not on paid basis. Hence,
many items need some adjustment while preparing
the financial statements. In this chapter we shall
discuss all items which require adjustments and
the way these are brought into the books of account
and incorporated in the final accounts.
10.1 Need for Adjustments
According to accrual concept of accounting, the profit
or loss for an accounting year is not based on the
revenues realised in cash and the expenses paid in
cash during that year. There may exist some receipts
and expenses in the current year which partially
relate to the previous year or to the next year. Also,
there may exist incomes and expenses relating to the
current year that still need to be brought into books
of account. Such items duly adjusted, the final
accounts will not reflect the true and fair view of the
state of affairs of the business.
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For example, an amount of Rs. 1,200 paid on July 01, 2013 towards
insurance premium. Any general insurance premium paid usually covers a period
of 12 months. Suppose the accounting year ends on March 31, 2014, it would
mean that one fourth of the insurance premium is paid on July 01, 2013 relate
to the next accounting year 2014-15. Therefore, while preparing the financial
statements for 2013-14, the expense on insurance premium that should be
debited to the profit and loss account is Rs. 900 (Rs. 1,200 Rs. 300).
Let us take another example. The salaries for the month of March, 2014
were paid on April 07, 2014. This means that the salaries account of 2013-14
does not include the salaries for the month of March 2014. Such unpaid salaries
is termed as salaries outstanding which have to be brought into books of
account and is debited to profit and loss account along with the salaries already
paid for the month of April, 2013 up to Feburary, 2014.
Similarly, adjustments may also become necessary in respect of certain
incomes received in advance or those which have accrued but are still to be
received. Apart from these, there are certain items which are not recorded on
day-to-day basis such as depreciation on fixed assets, interest on capital, etc.
These are adjusted at the time of preparing financial statements. The purpose of
making various adjustments is to ensure that the final accounts reveal the true
profit or loss and the true financial position of the business. The items which
usually need adjustments are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Closing stock
Outstanding/expenses
Prepaid/Unexpired expenses
Accrued income
Income received in advance
Depreciation
Bad debts
Provision for doubtful debts
Provision for discount on debtors
Managers commission
Interest on capital
It may be noted that when we prepare the financial statements, we are

provided with the trial balance and some other additional information in respect
of the adjustments to be made. All adjustments are reflected in the final
accounts at two places to complete the double entry. Our earlier example in
chapter 9 (Page no. 336) which represents the trial balance of Ankit is reproduced
in figure 10.1:
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Trial Balance of Ankit as on March 31, 2014
Account Title
Elements
Cash
Bank
Wages
Salaries
Furniture
Rent of building
Debtors
Bad debts
Purchases
Capital
Equity
Sales
Creditors
Long-term loan (raised on 1.4.2013)
Commission received
Assets
Assets
Expense
Expense
Assets
Expense
Assets
Expense
Expense
L.F.
Debit
Amount
Rs.
Credit
Amount
Rs.
1,000
5,000
8,000
25,000
15,000
13,000
15,500
4,500
75,000
12,000
Revenue
Liabilities
Liabilities
Revenue
Total
1,25,000
15,000
5,000
5,000
1,62,000
1,62,000
Additional Information : The stock on March 31, 2014 was Rs. 15,000.
Figure 10.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe how
these adjustments are helpful in the preparation of financial statements in order
to reflect the true profit and loss and financial position of the firm.
10.2 Closing Stock
As per the example in chapter 9 (Page no. 336), the closing stock represents the
cost of unsold goods lying in the stores at the end of the accounting period. The
adjustment with regard to the closing stock is done by (i) by crediting it to the
trading and profit and loss account, and (ii) by showing it on the asset side of
the balance sheet. The adjustment entry to be recorded in this regard is :
Closing stock A/c
To Trading A/c
Dr.
The closing stock of the year becomes the opening stock of the next year
and is reflected in the trial balance of the next year. The trading and profit
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and loss account of Ankit for the year ended March 31, 2014 and his balance
sheet as on that date shall appear as follows :
Trading and Profit and Loss Account of Ankit
for the year ended March 31, 2014
Dr.
Cr.
Expenses/Losses
Amount
Rs.
Purchases
Wages
Gross profit c/d
75,000
8,000
57,000
Revenues/Gains
Sales
Closing stock
1,40,000
Salaries
Rent of building
Bad debts
Net profit (transferred to
Ankits capital account)
25,000
13,000
4,500
19,500
62,000
Amount
Rs.
1,25,000
15,000
1,40,000
Gross profit b/d

Commission received
57,000
5,000
62,000
Sometimes the opening and closing stock are adjusted through purchases
account. In that case, the entry recorded is as follows :
Closing stock A/c
Dr.
To Purchases A/c
This entry reduces the amount in the purchases account and is also
known as adjusted purchases which is shown on the debit side of the trading
and profit and loss account. In this context, it may be noted, that the closing
stock will not be shown on the credit side of the trading and profit and loss as
it has been already been adjusted through the purchases account. Not only,
in such a situation, even the opening stock will not be separately reflected in
the trading and profit and loss account, as it is also adjusted in purchases by
recording the following entry:
Purchases A/c
Dr.
To Opening stock A/c
Another important point to be noted in this context is that when the
opening and closing stocks are adjusted through purchases, the trial
balance does not show any opening stock. Instead, the closing stock shall
appear in the trial balance (not as additional information or as an
adjustment item) and so also the adjusted purchases. In such a situation,
the adjusted purchases shall be debited to the trading and profit and loss
account.
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The closing stock shall be shown on the assets side of the balance sheet as
shown below:
Balance Sheet of Ankit as at March 31, 2014
Liabilities
Owners funds
Capital
Add Net profit
Non-Current Liabilities
Long-term loan
Current Liabilities
Creditors
Amount
Rs.
12,000
19,500
31,500
5,000
15,000
Assets
Amount
Rs.
Non-Current Assets
Furniture
Current Assets
Debtors
Bank
Cash
Closing stock
51,500
15,000
15,500
5,000
1,000
15,000
51,500
10.3 Outstanding Expenses

It is quite common for a business enterprise to have some unpaid expenses in
the normal course of business operations at the end of an accounting year.
Such items usually are wages, salaries, interest on loan, etc.
When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses. As they relate to
the earning of revenue during the current accounting year, it is logical that they
should be duly charged against revenue for computation of the correct amount
of profit or loss. The entry to bring such expenses into account is :
Concerned expense A/c
To Outstanding expense A/c
Dr.
The above entry opens a new account called Outstanding Expenses which
is shown on the liabilities side of the balance sheet. The amount of outstanding
expenses is added to the total of expenses under a particular head for the
purpose of preparing trading and profit and loss account.
For example, refer to Ankits trial balance (refer figure 10.1). You will notice
that wages are shown at Rs. 8,000. Let us assume that Ankit owes Rs.500 as
wages relating to the year 2013-14 to one of his employees. In that case, the
correct expense on wages amounts to Rs. 8,500 instead of Rs. 8,000. Ankit
must show Rs. 8,500 as expense on account of wages in the trading and
profit and loss account and recognise a current liability of Rs. 500 towards
the sum owed to his staff. It will be referred to as wages outstanding and it
will be adjusted to wages account by recording the following journal entry:
Wages A/c
Dr.
500
To Wages outstanding A/c
500
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The amount of outstanding wages will be added to wages account for the
preparation of the trading and profit and loss account as follows :
Dr.
Expenses/Losses
Amount
Rs.
Purchases
Wages
8,000
Add Outstanding wages
500
Gross profit c/d
Revenues/Gains
75,000
Sales
8,500
56,500
Closing stock
1,40,000
Salaries
Rent of building
Bad debts
25,000
13,000
4,500
19,000
Cr.
Amount
Rs.
1,25,000
15,000
1,40,000
Gross profit b/d

Commission received
61,500
56,500
5,000
61,500
Observe carefully the trading and profit and loss account of Ankit. Did
you notice the amount of net profit is reduced to Rs. 19,000 on account of
outstanding wages. The item relating to outstanding wages will be shown in
balance sheet as follows :
Liabilities
Owners Funds
Capital
Add Profit
Long-term loan
Current Liabilities
Creditors
Outstanding wages
Amount
Rs.
12,000
19,000
31,000
5,000
15,000
500
51,500
Assets
Non-Current Assets
Furniture
Current Assets
Debtors
Bank
Cash
Closing stock
Amount
Rs.
15,000
15,500
5,000
1,000
15,000
51,500
10.4 Prepaid Expenses

There are several items of expense which are paid in advance in the normal
course of business operations. At the end of the accounting year, it is found
that the benefits of such expenses have not yet been fully received; a portion
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of its benefit would be received in the next accounting year. This portion of
expense, is carried forward to the next year and is termed as prepaid expenses.
The necessary adjustment in respect of prepaid expenses is made by recording
the following entry:
Prepaid expense A/c
Dr.
To concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid
part is deducted from the total of the particular expense, and the new account
of prepaid expense is shown on the liabilities side of the balance sheet. For
example, in Ankits trial balance, let us assume that the amount of salary
paid by him to the employees includes an amount of Rs. 5,000 which was
paid in advance to one of his employees upon his joining the office. This
implies that Ankit has overpaid his staff by Rs. 5,000 on account of his salary.
Hence, correct expense on account of salary during the current period will be
Rs. 20,000 instead of Rs. 25,000. Ankit must show Rs. 20,000 expense on
account of salary in the profit and loss account and recognise a current asset
of Rs. 5,000 as an advance salary to the employee. It will be termed as prepaid
salary account and will be recorded by the following journal entry :
Prepaid salary A/c
Dr.
5,000
To salary A/c
5,000
The account of prepaid salary will be shown in the trading and profit and
loss account as follows:
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Gross profit c/d
Amount
Rs
75,000
8,000
500
Revenues/Gains
Sales
Closing stock
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
25,000
Less Prepaid salary
(5,000)
Rent of building
Bad debts
Net profit (transferred to Ankit
capital account)
Amount
Rs.
1,40,000
Gross profit b/d
20,000
13,000
4,500
24,000
61,500
Commission received
56,500
5,000
61,500
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Observe how the prepaid salary has resulted in an increase of net profit by
Rs. 5,000 making it as Rs. 24,000 Further, the item relating to prepaid salary
will be shown in the balance sheet on the assets side as follows :
Balance Sheet of Ankit as at March 31,2014
Liabilities
Owners Funds
Capital
Add Profit
Long-term loan
Current Liabilities
Amount
Rs.
12,000
24,000
Creditors
Outstanding wages
36,000
5,000
15,000
500
Assets
Amount
Rs.
Non-Current Assets
Furniture
Current Assets
Debtors
Prepaid salary
Bank
Cash
Closing stock
56,500
15,000
15,500
5,000
5,000
1,000
15,000
56,500
10.5 Accrued Income

It may also happen that certain items of income such as interest on loan,
commission, rent, etc. are earned during the current accounting year but
have not been actually received by the end of the same year. Such incomes
are known as accrued income. The adjusting entry for accrued income is :
Accrued income A/c
Dr.
To Concerned income A/c
The amount of accrued income will be added to the related income in the
profit and loss account and the new account of accrued income will appear
on the asset side of the balance sheet.
Let us, for example, assume that Ankit was giving a little help to a fellow
businessman by introducing few parties to him on commission for this service.
In the trial balance of Ankit you will notice an item of commission received
amounting to Rs. 5,000. Assume that the commission amounting to
Rs.1, 500 was still receivable from the fellow businessman. This implies that
income from commission earned during 2013-14 is Rs. 6, 500 (Rs.5, 000 + Rs.
1,500) Ankit needs to record an adjustment entry to give effect to the accrued
commission as follows :
Accrued Commission A/c
To Commission A/c
Dr.
1,500
1,500
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The account of accrued income will be recorded in trading and profit and
loss account as follows :
Dr.
Cr.
Expenses/Losses
Amount
Rs.
Purchases
Wages
Add Outstanding
Gross profit c/d
75,000
8,000
500
Revenues/Gains
Sales
Closing stock
25,000
(5,000)
Bad debts
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
Amount
Rs.
1,40,000
Gross profit b/d
20,000
13,000
4,500
25,500
Commission received 5,000

Add Accrued
1,500
commission
63,000
56,500
6,500
63,000
Observe that the accrued income has resulted in an increase in the net
profit by Rs. 1,500 making it as Rs. 25,500. Further, it will be shown in the
balance sheet of Ankit on the assets side under the head current asset.
Liabilities
Owners Funds
Capital
Add Profit
Long-term loan
Current Liabilities
Creditors
Outstanding wages
Amount
Rs.
12,000
25,500
37,500
5,000
15,000
500
58,000
Assets
Non-Current Assets
Furniture
Current Assets
Debtors
Prepaid salary
Accrued commission
Bank
Cash
Closing stock
Amount
Rs.
15,000
15,500
5,000
1,500
5,000
1,000
15,000
58,000
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10.6 Income Received in Advance

Sometimes, a certain income is received but the whole amount of it does not
belong to the current period. The portion of the income which belongs to the
next accounting period is termed as income received in advance or an Unearned
Income. Income received in advance is adjusted by recording the following
entry:
Concerned income A/c
Dr.
To Income received in advance A/c
The effect of this entry will be that the balance in the income account will
be equal to the amount of income earned for the current accounting period,
and the new account of income received in advance will be shown as a liability
in the balance sheet.
For example, let us assume Ankit has agreed in March 31, 2014 to sublet
a part of the building to a fellow shopkeeper @ Rs. 1,000 per month. The
person gives him rent in advance for the next three months of April, May and
June. The amount received had been credited to the profit and loss account.
However, this income does not pertain to current year and hence will not be
credited to profit and loss account. It is income received in advance and will be
recognised as a liability amounting to Rs. 3,000. Ankit needs to record an
adjustment entry to give effect to income received in advance by way of following
journal entry:
Rent received A/c
To Rent received in advance A/c
Dr.
3,000
3,000
This will lead a new account of rent received in advance of Rs. 3,000 which
will appear as follows :
Liabilities
Owners Funds
Capital
12,000
Add Net profit
25,500
Non Current Liabilities
Long-term loan
Current Liabilities
Creditors
Outstanding wages
Rent received in advance
Amount
Rs.
37,500
5,000
15,000
500
3,000
61,000
Assets
Non Current Assets
Furniture
Current Assets
Debtors
Prepaid salary
Accrued commission
Bank
Cash
Closing stock
Amount
Rs.
15,000
15,500
5,000
1,500
5,000
4,000
15,000
61,000
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10.7 Depreciation
Recall from chapter 7 (Part-I), that depreciation is the decline in the value of
assets on account of wear and tear and passage of time. It is treated as a business
expense and is debited to profit and loss account. This, in effect, amounts to
writing-off a portion of the cost of an asset which has been used in the business
for the purpose of earning profits. The entry for providing depreciation is :
Depreciation A/c
Dr.
To Concerned asset A/c
In the balance sheet, the asset will be shown at cost minus the amount of
depreciation. For example, the trial balance in our example shows that Ankit
has a furniture account with a balance of Rs. 15,000. Let us assume that
furniture is subject to a depreciation of 10% per annum. This implies that
Ankit must recognise that at the end of the year the value attached to furniture
is to be reduced by Rs. 1,500 (Rs. 15,000 10%). Ankit needs to record an
adjustment entry to give effect to depreciation on furniture as follows :
Depreciation A/c
Dr.
1,500
To Furniture A/c
1,500
Depreciation will be shown in the profit and loss account and balance
sheet as follows :
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Gross Profit c/d
Amount
Rs.
75,000
8,000
(500 )
Revenues/Gains
Sales
Closing stock
Depreciation-Furniture
Bad debts
25,000
(5,000 )
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
Amount
Rs.
1,40,000
Gross profit b/d
20,000
13,000
1,500
4,500
24,000
63,000

Add Accrued
1,500
Commission
56,500
6,500
63,000
Notice that the amount of net profit declines with the adjustment of depreciation.
Let us now see how depreciation as an expense will be shown in balance sheet.
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Balance Sheet of Ankit
as at March 31, 2014
Liabilities
Owners Funds
Capital
12,000
Add Profit
24,000
Long-term loan
Current Liabilities
Creditors
Outstanding wages
Amount
Rs.
36,000
5,000
15,000
500
3,000
Assets
Amount
Rs.
Non-Current Assets
Furniture
15,000
Less Depreciation (1,500)
Current Assets
Debtors
Prepaid salary
Accrued commission
Bank
Cash
Closing stock
59,500
13,500
15,500
5,000
1,500
5,000
4,000
15,000
59,500
10.8 Bad Debts

Bad debts refer to the amount that the firm has not been able to realise from its
debtors. It is regarded as a loss and is termed as bad debt. The entry for recording
bad debt is:
Bad debts A/c
To Debtors A/c
Dr.
You will notice in Ankits trial balance, that it contains bad debts amounting
to Rs. 4,500. Whereas, the sundry debtors of Ankit are reported as Rs. 15,500.
The existence of bad debts in the trial balance signifies that Ankit has incurred
a loss arising out of bad debts during the year and which has been already
recorded in the books of account.
However, assuming one of his debtors who owed him Rs. 2,500 had become
insolvent, and nothing is receivable from him. But the amount of bad debts
related to the current year is still to be account for. This fact appears as
additional information and is termed as further bad debts. The adjustment
entry to be recorded for the amount will be as follows. For this purpose, Ankit
needs to record an adjustment entry as under :
Bad debts A/c
To Debtors A/c
Dr.
2,500
2,500
This entry will reduce the value of debtors to Rs. 13,000( Rs. 15,500
Rs. 2,500) and increases the amount of bad debts to Rs. 7,000 (Rs. 4,500 +
Rs. 2,500).
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The treatment of further bad debts in profit and loss account and balance
sheet is shown below :
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Gross profit c/d
Amount
Rs.
75,000
8,000
500
Revenues/Gains
Amount
Rs.
1,25,000
15,000
Sales
Closing stock
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
25,000
(5,000 )
Depreciation Furniture
Bad Debts
4,500
Add Further bad debts
2,500
1,40,000
Gross profit b/d
20,000
13,000
56,500

Add Accrued
1,500
commission
6,500
1,500
7,000
21,500
63,000
63,000

Liabilities
Owners Funds
Capital
Add Profit
Long-term loan
12,000
21,500
Current Liabilities and Provisions

Creditors
Outstanding Wages
Amount Assets
Rs.
Non-Current Assets
Furniture
33,500 Less Depreciation
Current Assets
5,000 Debtors
Less Further bad debts
Prepaid salary
15,000 Accrued commission
Bank
500 Cash
Closing stock
3,000
57,000
Amount
Rs.
15,000
(1,500) 13,500
15,500
(2,500) 13,000
5,000
1,500
5,000
4,000
15,000
57,000
10.9 Provision for Bad and Doubtful Debts

In the above balance sheet, debtors now appears at Rs. 13,000, which is their
estimated realisable value during next year. It is quite possible that the whole
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of this amount may not be realised in future. However, it is not possible to

accurately know the amount of such bad debts. Hence, we make a reasonable
estimate of such loss and provide the same. Such provision is called provision
for bad debts and is created by debiting profit and loss account. The following
journal entry is recorded in this context :
Profit and Loss A/c
Dr.
To Provision for doubtful debts A/c
Provision for doubtful debts is also shown as a deduction from the debtors
on the asset side of the balance sheet.
Let us assume, Ankit feels that 5% of his debtors on March 31, 2014 are
likely to default on their payments next year. This implies he expects bad
debts of Rs. 650 (Rs. 13,000 5%). Ankit needs to record the adjustment
entry as :
Profit and loss A/c
Dr.
650
650
This implies that Rs. 650 will reduce the current years profit on account
of doubtful debts. In the balance sheet, it will be shown as a deduction from
sundry debtors.
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Add Outstanding
Gross profit c/d
Amount
Rs.
75,000
8,000
500
Revenues/Gains
Sales
Closing stock
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
25,000
Less Prepaid salary
(5,000)
Rent of building
Bad debts
4,500
2,500
Net profit (transferred to Ankits
capital account)
Amount
Rs.
1,40,000
Gross profit b/d
20,000
13,000
1,500

Add Accrued
1,500
commission
56,500
6,500
7,000
650
20,850
63,000
63,000
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Liabilities
Owners Funds
Capital
Add Net profit
Long-term loan
Amount Assets
Rs.
12,000
20,850
Current Liabilities & Provisions

Creditors
Outstanding wages
32,850
5,000
15,000
500
3,000
Non-Current Assets
Furniture
15,000
Less Depreciation
(1,500)
Current Assets
Debtors
15,500
Less Furtherbad debts 2,500
13,000
Less Provision for
650
doubtful debts
Prepaid salary
Accrued commission
Bank
Cash
Closing stock
56,350
Amount
Rs.
13,500
12,350
5,000
1,500
5,000
4,000
15,000
56,350
It may be noted that the provision created for doubtful debts at the end of
a particular year will be carried forward to the next year and it will be used for
meeting the loss due to bad debts incurred during the next year. The provision
for doubtful debts brought forward from the previous year is called the opening
provision or old provision. When such a provision already exists, the loss due
to bad debts during the current year are adjusted against the same and while
making provision for doubtful debts required at the end of the current year is
called new provision. The balance of old provision as given in trial balance
should also be taken into account.
Let us take an example to understand how bad debts and provision for
doubtful debts are recorded. An extract from a trial balance on March 31, 2014
is given below :
Sundry debtors
Bad debts
Rs.
32,000
2,000
3,500
Additional Information :
Write-off further bad debts Rs. 1,000 and create a provision for doubtful debts
@ 5% on debtors.
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In this case, the following journal entries will be recorded :

Date
Debit
L.F. Amount
Rs.
Particulars
(a) Bad debts A/c
To Sundry debtors
(Futher bad debts)
Dr.
Credit
Amount
Rs.
1,000
1,000
(b) Provision for doubtful debts A/c Dr.

To Bad debts A/c
(Bad debts adjusted against the provision)
3,000
Profit and Loss A/c

Dr.
(Amount charges from profit and loss account)
1,050
3,000
1,050
Profit and Loss Account

Rs.
Provision for doubtful debts:
Bad debts
2,000
Further bad debts
1,000
New provision
1,550
4,550
Less Old provision
3,500
Rs.
1,050
*Only relevant items.

Balance Sheet as at March 31, 2014
Rs.
Sundry debtors
32,000
Less Further
(1,000)
bad debts
31,000
Less Provision
(1,550)
for doubtful debts
29,450
*Only relevant items.

Note : The amount of new provision for doubtful debts has been calculated as follows:
Rs. 31,000 1 5/100 = Rs. 1,550.
10.10 Provision for Discount on Debtors

A business enterprise allows discount to its debtors to encourage prompt
payments. Discount likely to be allowed to customers in an accounting year
2015-16
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Accountancy
can be estimated and provided for by creating a provision for discount on debtors.
Provision for discount is made on good debtors which are arrived at by deducting
further bad debts and the provision for doubtful debts. The following journal
entry is recorded to create provision for discount on debtors:
Profit and loss A/c
Dr.
To Provision for discount on debtors A/c
As stated above, the provision for discount on debtors will be created only
on good debtors. It will be calculated on the amount of debtors arrived at after
deducting the doubtful debts, i.e. Rs. 12,350 (Rs. 13,000 Rs. 650).
Ankit needs to record the adjustment entry as :
Profit and loss A/c
Dr.
To Provision for discount on debtors A/c
227
227
This will reduce the current year profit by Rs. 227 on account of probable
discount on prompt payment. In the balance sheet, it will be shown as a
deduction from the debtors account to portray correctly the expected realiable
value of debtors as Rs. 12,123.
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Gross profit c/d
Amount
Rs.
75,000
8,000
(500 )
Revenues/Gains
Sales
Closing stock
25,000
(5,000 )
DepreciationFurniture
Bad debts
4,500
2,500
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
Amount
Rs.
1,40,000
Gross profit b/d
20,000
13,000
1,500

Add Accrued
1,500
commission
56,500
6,500
7,000
650
227
20,623
63,000
63,000
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389
Balance Sheet of Ankit as on March 31, 2014

Liabilities
Amount
Rs.
Owners Funds
Capital
Add Net profit
Long-term loan
12,000
20,623
Current Liabilities & Provisions

Creditors
Outstanding wages
32,623
5,000
15,000
500
Assets
Non-Current Assets
Furniture
15,000
Less Depreciation
(1,500)
Current Assets
Debtors
15,500
Less Further
2,500
bad debts
13,000
Less Provision
for doubtful
650
debts
12,350
Less Provision
for discount
on debtors
(227)
Prepaid salary
Accrued commission
Bank
Cash
Closing stock
Amount
Rs.
13,500
12,123
5,000
1,500
5,000
4,000
15,000
3,000
56,123
56,123
In the subsequent year, the discount will be transferred to the provision

for discount on debtors account. The account will be treated in the same
manner as the provision for doubtful debts.
10.11 Managers Commission
The manager of the business is sometimes given the commission on the net
profit of the company. The percentage of the commission is applied on the
profit either before charging such commission or after charging such commission.
In the absence of any such information, it is assumed that commission is
allowed as a percentage of the net profit before charging such commission.
Suppose the net profit of a business is Rs. 110 before charging commission.
If the manager is entitled to 10% of the profit before charging such commission,
the commission will be calculated as :
= Rs. 110
10
= Rs. 11
100
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Accountancy
In case the commission is 10% of the profit after charging such commission,
it will be calculated as :
= Profit before commission Rate of commission/ (100 + commission)
= Rs. 110
10
110
= Rs. 10.
The managers commission will be adjusted in the books of account by

recording the following entry :
Profit and loss A/c
To Managers commission A/c
Dr.
Let us recall our example and assume that Ankits manager is entitled to a
commission @ 10%. Observe the following profit and loss account if it is based
on :
(i) amount of net profit before charging such commission
(ii) amount of profit after charging such commission.
(i) Trading and Profit and Loss Account of Ankit
Dr.
Cr.
Expenses/Losses
Purchases
Wages
Gross profit c/d
Amount
Rs.
75,000
8,000
500
Revenues/Gains
Sales
Closing stock
25,000
(5,000)
Bad debts
4,500
2,500
Managers commission
1,25,000
15,000
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
Amount
Rs.
1,40,000
Gross profit
20,000
13,000
1,500

Add Accrued
1,500
commission
56,500
6,500
7,000
650
227
2,062
18,561
63,000
63,000
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391

Amount Assets
Rs.
Owners Funds
Non-Current Assets
Capital
12,000
Furniture
15,000
Add Net profit
18,561
30,561 Less Depreciation
(1,500)
Current Assets
Long-term loan
5,000 Debtors
15,500
Less Further bad debts(2,500)
13,000
Less Provision for
doubtful
(650)
Creditors
15,000
debts
12,350
Less Provision for
discount on debtors
(227)
Outstanding wages
500 Prepaid salary
3,000 Accrued commission
Bank
Cash
Managers commission
2,062 Closing stock
outstanding
56,123
Liabilities
Amount
Rs.
13,500
12,123
5,000
1,500
5,000
4,000
15,000
56,123
(ii) Trading and Profit and Loss Account of Ankit

Dr.
Expenses/Losses
Purchases
Wages
Gross profit c/d
Amount
Rs.
75,000
8,000
500
Sales
Closing stock
Cr.
Amount
Rs.
1,25,000
15,000
Gross profit b/d
1,40,000
56,500
Revenues/Gains
8,500
56,500
1,40,000
Salaries
Less Prepaid salary
Rent of building
25,000
(5,000)
DepreciationFurniture
Bad debts
4,500
2,500
Provision for
doubtful debts
Provision for discount on
debtors
Managers commission
20,000
13,000
1,500

Add Accrued
1,500
commission
6,500
7,000
650
227
1,875
18,748
63,000
63,000
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Accountancy
Liabilities
Owners Funds
Capital
Add Net profit
Long-term loan
Amount
Rs.
12,000
18,748

Creditors
Outstanding wages
Manager commission
outstanding
30,748
5,000
Assets
Non-Current Assets
Furniture
Less Depreciation
Amount
Rs.
15,000
(1,500) 13,500
3,000
Current Assets
Debtors
15,500
Less Further bad debts (2,500)
13,000
Less Provision
for doubtful
(650)
debts
12,350
Less Provision for
discount on debtors(227) 12,123
Prepaid salary
5,000
Accrued commission
1,500
Bank
5,000
Cash
4,000
1,875
Closing stock
15,000
500
56,123
15,000
56,123
10.12 Interest on Capital

Sometimes, the proprietor may like to know the profit made by the business
after providing for interest on capital. In such a situation, interest is calculated
at a given rate of interest on capital as at the beginning of the accounting
year. If however, any additional capital is brought during the year, the interest
may also be computed on such amount from the date on which it was brought
into the business. Such interest is treated as expense for the business and
the following journal entry is recorded in the books of account:
Interest on capital A/c
Dr.
To Capital A/c
In the final accounts, it is shown as an expense on the debit side of the
profit and loss account and added to capital in the balance sheet.
Let us assume, Ankit decides to provide 5% interest on his capital. This
shall amount to Rs. 600 for which the following journal entry will be recorded:
Dr.
600
To Capital A/c
600
This implies that net profit shall be reduced by Rs. 600. As a result, the
reduced amount of profit shall be added to the capital in the balance sheet.
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393
But, when interest on capital shall be added to the capital, this effect shall be
neutralised. As shown below :
Rs.
Capital
12,000
Add Profit
17,961
29,961
Add Interest on capital
600
30,561
Test Your Understanding
Tick the correct answer :
1. Rahuls trial balance provide you the following information :
Debtors
Rs. 80,000
Bad debts
Rs. 2,000
Rs. 4,000
It is desired to maintain a provision for bad debts of Rs. 1,000
State the amount to be debited/credited in profit and loss account :
(a) Rs. 5,000 (Debit)
(b) Rs. 3,000 (Debit)
(c) Rs. 1,000 (Credit)
(d) none of these.
2. If the rent of one month is still to be paid the adjustment entry will be :
(a) Debit outstanding rent account and Credit rent account
(b) Debit profit and loss account and Credit rent account
(c) Debit rent account and Credit profit and loss account
(d) Debit rent account and Credit outstanding rent account.
3. If the rent received in advance Rs. 2,000. The adjustment entry will be :
(a) Debit profit and loss account and Credit rent account
(b) Debit rent account Credit rent received in advance account
(c) Debit rent received in advance account and Credit rent account
(d) None of these.
4. If the opening capital is Rs. 50,000 as on April 01, 2014 and additional capital
introduced Rs. 10,000 on January 01, 2015. Interest charge on capital 10% p.a.
The amount of interest on capital shown in profit and loss account as on March
31, 2015 will be :
(a) Rs. 5,250
(b) Rs. 6,000
(c) Rs. 4,000
(d) Rs, 3,000.
5. If the insurance premium paid Rs. 1,000 and pre-paid insurance Rs. 300. The amount
of insurance premium shown in profit and loss account will be :
(a) Rs. 1,300
(b) Rs. 1,000
(c) Rs. 300
(d) Rs. 700.
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Accountancy
Adjustment
Adjustment Entry
1. Closing stock
Closing stock A/c

To Trading A/c
Dr.
Shown on the credit Shown on the

assets side and profit assets side
and loss account
2. Outstanding
expenses
Expense A/c
To outstanding
expense A/c
Dr.
Added to the
respective expense
on the debit side
3. Prepaid/
Unexpired
expenses
Prepaid expense A/c

To Expenses A/c
Dr.
Deducted from the

Shown on the
respective expense on assets side
the debit side
4. Income earned Accured income A/c

but not received To Income A/c
Dr.
Added to the
respective income
on the credit side
Shown on the
assets side
5. Income received Income A/c

in advance
To Income received
in advence A/c
Dr.
Deducted from the

respective income
on the credit side
Shown on the
liabilities
sides
6. Depreciation
Dr.
Shown on the debit

side
Deducted from
the value of
asset
7. Provision for
Profit and Loss A/c
bad and
To Provision for
doubtful debts doubtful debts
Dr.
Shown on the debit

side
Shown as
deduction
from debtors
8. Provision for
discount on
debtors
Profit and Loss A/c

To Provision for
discount debtors
Dr.
Shown on the debit

side
Shown as
deductoin
form debtors
9. Managers
commission
Dr.
Shown on the debit

side
Shown on the
liabilities side
10. Interest on
capital
Managers
commission A/c
To outstanding
commission A/c
To capital A/c
Dr.
Shown on the debit

side
Shown as
addition to
capital
11. Further bad

debts
Bad debts A/c

Dr.
To Sundry Debtors A/c
Shown on the debit

side
Deducted from
debtors
Depreciaton A/c
To Assets A/c
Treatment in Trading
and Profit and Loss
Account
Treatment in
Balance Sheet
Shown on the
liabilities side
Fig. 10.2 : Showing treatment of various types of adjustments
2015-16
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Illustration 1
From the following balances, prepare the trading and profit and loss account and balance
sheet as on March 31, 2014.
Debit Balances
Drawings
Cash at bank
Bills receivable
Loan and Building
Furniture
Discount allowed
Bank charges
Salaries
Purchases
Stock (opening)
Sales return
Carriage
Rent and Taxes
General expenses
Plant and Machinery
Book debts
Bad debts
Insurance
Amount
Rs.
6,300
13,870
1,860
42,580
5,130
3,960
100
6,420
1,99,080
60,220
1,870
5,170
7,680
3,630
31,640
82,740
1,250
750
Credit Balances
Capital
Discount received
Loans
Purchases return
Sales
Reserve for bad debts
Creditors
4,74,250
Amount
Rs.
1,50,000
2,980
15,000
1,450
2,81,500
4,650
18,670
4,74,250
Adjustments
1.
2.
3.
4.
5.
Closing stock Rs. 70,000

Create a reserve for bad and doubtful debts @ 10% on book debts
Insurance prepaid Rs. 50
Rent outstanding Rs. 150
Interest on loan is due @ 6% p.a.
Solution
Trading and Profit and Loss Account
Dr.
Cr.
Expenses/Losses
Opening stock
Purchase
Less Purchases return
Carriage
Gross profit c/d
Amount
Rs.
60,220
1,99,080
(1,450 )
1,97,630
5,170
86,610
3,49,630
Revenues/Gains
Amount
Rs.
Sales
2,81,500
Less : Sales return (1,870) 2,79,630
Closing stock
70,000
3,49,630
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Accountancy
Discount allowed
Bank charges
Salaries
Rent and Taxes
7,680
Add Rent outstanding
150
General expenses
Insurance
750
Less Insurance prepaid
(50 )
Bad debts
1,250
Add New provision
8,274
for bad debts
9,524
Less Old provision
(4,650 )
for bad debts
Interest on loan outstanding
capital account)
3,960
100
6,420
Gross profit b/d

Discount received
86,610
2,980
7,830
3,630
700
4,874
900
61,176
89,590
89,590
Liabilities
Creditors
Loan
Add Interest on loan
outstanding
Rent outstanding
Capital
Add Net profit
Less Drawings
Amount
Rs.
15,000
900
18,670
Cash at bank
15,900
Book debts
150
1,50,000
61,176
2,11,176
(6,300 )
Assets
2,04,876
2,39,596
Amount
Rs.
13,870
82,740
Less Reserve
(8,274)
for bad debts
Bills receivable
Land and Building
Furniture
Plant and Machinery
Insurance (prepaid)
Closing stock
74,466
1,860
42,580
5,130
31,640
50
70,000
2,39,596
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397
Illustration 2
The following were the balances extracted from the books of Yogita as on March 31, 2014:
Debit Balances
Amount
Rs.
Credit Balances
Cash in hand
Cash at bank
Purchases
Return inwards
Wages
Fuel and Power
Carriage on sales
Carriage on purchases
Opening stock
Building
Freehold land
Machinery
Salaries
Patents
General expenses
Insurance
Drawings
Sundry debtors
540
2,630
40,675
680
8,480
4,730
3200
2040
5,760
32,000
10,000
20,000
15,000
7,500
3,000
600
5,245
14,500
Sales
Return outwards
Capital
Sundry creditors
Rent
Amount
Rs.
98,780
500
62,000
6,300
9,000
Taking into account the following adjustments prepare trading and profit and loss account
and balance sheet as on March 31, 2014 :
(a)
(b)
(c)
(d)
Stock in hand on March 31, 2014,was Rs. 6,800.

Machinery is to be depreciated at the rate of 10% and patents @ 20%.
Salaries for the month of March, 2014 amounting to Rs. 1,500 were outstanding.
Insurance includes a premium of Rs. 170 on a policy expiring on September 30,
2014.
(e) Further bad debts are Rs. 725. Create a provision @ 5% on debtors.
(f) Rent receivable Rs. 1,000.
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Accountancy
Solution:
Books of Yogita
Dr.
Expenses/Losses
Opening stock
Purchases
Less Return outwards
Wages
Fuel and Power
Carriage on purchases
Gross profit c/d
Amount
Rs.
5,760
40,675
(500)
Salaries
15,000
Add Outstanding salaries 1,500
Carriage
General expenses
Insurance
600
Less Prepaid insurance
(85 )
Further bad debts
725
Add Provision for doubtful debts 689
Depreciation : machinery 2,000
Patent
1,500
Net profit
(transferred to capital account)
40,175
8,480
4,730
2,040
43,715
1,04,900
16,500
3,200
3,000
Cr.
Amount
Rs.
Revenues/Gains
Sales
98,780
Less Return inwards (680)
Closing stock
Gross profit b/d

Rent
Add Accrued rent
98,100
6,800
1,04,900
43,715
9,000
1,000
10,000
515
1,414
3,500
25,586
53,715
53,715

Dr.
Liabilities
Amount
Rs.
6,300
Sundry creditors
Salaries outstanding
Capital
1,500
62,000
Add Net profit
25,586
87,586
Less Drawings
(5,245)
82,341
90,141
Cr.
Amount
Rs.
540
2,630
Assets
Cash in hand
Cash in bank
Sundry debtors
Less Further
bad debts
Less Provision
for bad debts
Insurance prepaid
Stock
Rent accrued
Freehold land
Building
Machinery
Less Depreciation
Patents
Less Depreciation
14,500
(725)
13,775
(689)
13,086
85
6,800
1,000
10,000
32,000
20,000
(2,000)
7,500
(1,500)
18,000
6,000
90,141
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Illustration 3
The following balances were extracted from the books of Shri R. Lal on March 31, 2014
Account Title
Capital
Drawings
Purchases
Sales
Purchases return
Stock on April 01, 2013
Amount
Rs.
1,00,000
17,600
80,000
1,40,370
2,820
11,460
Bad debts
doubtful debts reserve
April 01, 2013
1,400
3,240
Rates and Insurance

Discount (Cr.)
Bills receivable
Sales returns
Wages
1,300
190
1,240
4,240
6,280
Buildings
Account Title
Amount
Rs.
Rent (Cr.)
Railway freight on sales
Carriage inwards
Office expenses
Printing and Stationery
Postage and Telegram
2,100
16,940
2,310
1,340
660
820
Sundry debtors
Sundry creditors
62,070
18,920
Cash in bank
Cash in hand
Office furniture
Salaries and Commission
Addition to buildings
12,400
2,210
3,500
9,870
7,000
25,000
Prepare the trading and profit and loss account and a balance sheet as on March 31,
2014 after keeping in view the following adjustments :
(i) Depreciate old building by Rs. 625 and addition to building at 2% and office furniture
at 5%.
(ii) Write-off further bad debts Rs. 570.
(iii) Increase the bad debts reserve to 6% of debtors.
(iv) On March 31, 2014 Rs. 570 are outstanding for salary.
(v) Rent receivable Rs. 200 on March 31, 2014.
(vi) Interest on capital at 5% to be charged.
(vii) Unexpired insurance Rs. 240.
(viii) Stock was valued at Rs. 14,290 on March 31, 2014.
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Accountancy
Solution
Books of Shri R. Lal
Dr.
Cr.
Expenses/Losses
Opening stock
Purchases
Less Purchase return
Carriage inwards
Wages
Gross profit c/d
Amount
Rs.
11,460
80,000
(2,820 )
77,180
2,310
6,280
53,190
Revenues/Gains
Amount
Rs.
Sales
1,40,370
Less Sales Return
(4,240) 1,36,130
Closing stock
14,290
1,50,420
Railway freight on sales
Office expenses
Salary and Commission
9,870
Add Outstanding salary
570
Rates and Insurance
1,300
Less unexpired insurance
(240)
Bad debts
1,400
570
Add New doubtful debts
3,690
provision
5660
Less Old provision
(3,240)
for bad debts
Interest on capital
Depreciation on building
Depreciation on addition
to building
Depreciation on furniture
capital account)
16,940
1,340
820
660
1,50,420
Gross profit c/d
Rent
Add Accrued rent
Discount
53,190
2,100
200
2,300
190
10,440
1,060
2,420
5,000
625
140
175
16,060
55,680
55,680
2015-16
401
Liabilities
Sundry creditors
Outstanding salaries
Capital
Add Net profit
Less Drawings
Amount
Rs.
18,920
570
1,00,000
16,060
5,000
1,21,060
(17,600)
1,03,460
Assets
Cash at bank
Cash in hand
Bills receivable
Debtors
62,070
Less Further bad debts (570)
61,500
Less New provision (3,690)
for doubtful debts
Accrued rent
Unexpired insurance
Building
25,000
Less Depreciation
(625)
Addition to building 7,000
Less Depreciation
(140)
Office furniture
3,500
Less Depreciation
(175)
Closing stock
1,22,950
Amount
Rs.
12,400
2,210
1,240
57,810
200
240
24,375
6,860
3,325
14,290
1,22,950
Illustration 4
Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March
2014 and draw necessary Journal entries and balance sheet as on that date :
Debit Balances
Opening stock
Purchases
Cash in hand
Cash at bank
Return inwards
Wages
Fuel and Power
Carriage inwards
Insurance
Buildings
Plant
Patents
Salaries
Furniture
Drawings
Rent
Debtors
Amount
Rs.
24,000
1,60,000
16,000
32,000
4,000
22,000
18,000
6,000
8,000
1,00,000
80,000
30,000
28,000
12,000
18,000
2,000
80,000
6,40,000
Credit Balances
Sales
Return outwards
Capital
Creditors
Bills payable
Commission received
Amount
Rs.
4,00,000
2,000
1,50,000
64,000
20,000
4,000
6,40,000
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Accountancy
Adjustments
(a)
(b)
(c)
(d)
(e)
(f)
Rs.
12,000
6,000
2,400
Salaries outstanding
Wages outstanding
Commission is accrued
Depreciation on building 5% and plant 3%
Insurance paid in advance
Closing stock
700
12,000
Solution
Books of Mohit Traders
Journal
Date
Particulars
2014
March 31 Salary A/c
Wages A/c
To Salary outstanding A/c
To Wages outstanding A/c
(Amount of salary and wages outstanding
as on March 31, 2014)
L.F.
Dr.
Dr.
Debit
Amount
Rs.
12,000
6,000
12,000
6,000
March 31 Prepaid Insurance A/c

To Insurance A/c
(Insurance paid in advance]
Dr.
March 31 Commission accrued A/c
Dr.
1,400
1,400
2,400
To Commission A/c
(Commission accrued but not received)
2,400
March 31 Depreciation A/c

Dr.
To Building A/c
To Plant A/c
(Depreciation charged on plant and building)
March 31 Profit and Loss A/c
To Capital A/c
(Profit transferred to capital account)
Credit
Amount
Rs.
Dr.
7,400
5,000
2,400
1,23,700
1,23,700
2015-16
403
Books of Mohit Traders
Dr.
Cr.
Expenses /Losses
Amount
Rs.
24,000
Opening stock
Purchases
1,60,000
Less returns
(2,000 ) 1,58,000
Wages
22,000
6,000
28,000
Fuel and Power
18,000
Carriage inwards
6,000
Gross profit c/d
1,74,000
Revenue/Gains
Sales
Less Returns
Closing stock
Amount
Rs.
4,00,000
(4,000) 3,96,000
12,000
4,08,000
Salary
28,000
12,000
Insurances
8,000
Less Prepaid
(700)
Rent
Plants
Net Profit (transferred to capital
account)
40,000
7,300
2,000
5,000
4,08,000
Gross Profit b/d
1,74,000
Commission received(4,000)
Add Accrued
2,400
6,400
commission
2,400
1,23,700
1,80,400
1,80,400

Liabilities
Creditors
Bills payable
Capital
Add Net profit
Less Drawings
Outstanding wages
Amount
Rs.
64,000
20,000
1,50.000
1,23,700
2,73,700
(18,000)
2,55,700
12,000
6,000
3,57,700
Assets
Cash in hand
Cash at bank
Building
Plant
Patents
Debtors
Insurance prepaid
Commission accrued
Furniture
Closing stock
Amount
Rs.
16,000
32,000
95,000
77,600
30,000
80,000
700
2,400
12,000
12,000
3,57,700
2015-16
404
Accountancy
Illustration 5
The following information has been extracted from the trial balance of M/s Randhir
Transport Corporation.
Debit balances
Opening stock
Rent
Plant and Machinery
Land and Buildings
Power
Purchases
Sales return
Telegram and Postage
Wages
Salary
Insurance
Discount
Repair and Renewals
Legal charges
Trade taxes
Debtors
Investment
Bad debts
Trade expenses
Commission
Travelling expenses
Drawings
Amount
Rs.
40,000
2,000
1,20,000
2,55,000
3,500
75,000
2,500
400
4,500
2,500
3,200
1,000
2,000
700
1,200
75,000
65,000
2,000
4,500
1,250
1,230
20,020
6,82,500
Credit balances
Capital
Creditors
Bills payable
Loan
Discount
Sales
Provision for bad debts
General reserves
Amount
Rs.
2,70,000
50,000
50,000
1,10,000
1,500
1,50,000
1,000
50,000
6,82,500
Adjustments
1.
2.
3.
4.
5.
6.
7.
8.
9.
Closing stock for the year was Rs. 35,500.

Depreciation charged on plant and machinery 5% and land and building 6%.
Interest on drawing @ 6% and Interest on loan @ 5%.
Interest on investments @ 4%.
Further bad debts 2,500 and make provision for doubtful debts on debtors 5%.
Discount on debtors @ 2%.
Salary outstanding Rs. 200.
Wages outstanding Rs. 100.
Insurance prepaid Rs. 500.
You are required to make trading and profit and loss account and a balance sheet on
March 31, 2014
2015-16
405
Solution
Books of Randhir Transport Corporation
Expenses/Losses
Opening stock
Purchases
Wages
Power
Gross profit c/d
Amount
Rs.
40,000
75,000
4,500
100
Revenue/Gains
Sales
Less Sales return
Closing stock
Amount
Rs.
1,50,000
(2,500) 1,47,500
35,500
4,600
3,500
59,900
1,83,000
Rent
Telegram and Postage
Salary
2,500
200
Insurance
3,200
Less Prepaid
(500)
Discount
Repair and Renewals
Legal charges
Trade taxes
Trade expenses
Outstanding interest on loan
Commission
Travelling expenses
Discount on debtors
Depreciation on Plant and
Machinery
Depreciation on Land and
Building
Bad debts
2,000
2,500
Add New provision
3,553
8,053
Less Old provision
(1,000 )
Net Profit (transferred to
capital account)
2,000
400
2,700
1,83,000
Gross profit b/d
Outstanding interest
on investment
Discount
Interest on drawings
59,900
2,600
1,500
1,200
2,700
1,000
2,000
700
1,200
4,500
5,500
1,250
1,230
1,450
6,000
15,300
7,053
10,217
65,200
65,200
2015-16
406
Accountancy
Liabilities
Amount
Rs.
Assets
Creditors
Bills payable
Loan
1,10,000
Add Outstanding interest 5,500
General reserve
Capital
2,70,000
Add Net Profit
10,217
2,80,217
50,000
50,000
Debtors
Less Further
bad debts
Less Discount
Less Drawings
1,15,500
50,000
(20,020)
2,60,197
Less Interest on drawings 1,200
Outstanding salary
Outstanding wages
2,58,997
200
100
75,000
(2,500)
72,500
(1,450)
71,050
Less New Provision (3,553)
Investment
on investment
Insurance pre-paid
Plant and Machinery

Land and Building
Closing stock
5,24,797
Amount
Rs.
67,497
65,000
2,600
500
1,14,000
2,39,700
35,500
5,24,797
Illustration 6
From the following balances of M/s Keshav Bros. You are required to prepare trading and
profit and loss account and a balance sheet of March 31, 2014.
Debit balances
Plant and Machinery
Debtors
Interest
Wages
Salary
Carriage inwards
Carriage outwards
Return inwards
Factory rent
Office rent
Insurance
Furniture
Buildings
Bills receivable
Cash in hand
Cash at bank
Commission
Opening stock
Purchases
Bad debts
Amount
Rs.
1,30,000
50,000
2,000
1,200
2,500
500
700
2,000
1,450
2,300
780
22,500
2,80,000
3,000
22,500
35,000
500
60,000
2,50,000
3,500
8,70,430
Credit balances
Sales
Return outwards
Creditors
Bills payable
Capital
Rent received
Commission received
Amount
Rs.
3,00,000
2,500
2,50,000
70,000
1,550
2,20,000
10,380
16,000
8,70,430
2015-16
407
Adjustment
(i)
(ii)
(iii)
(iv)
Provision for bad debts @ 5% and further bad debts Rs. 2,000.
Rent received in advance Rs. 6,000.
Prepaid insurance Rs. 200.
Depreciation on furniture @ 5%, plant and machinery @ 6%, building @ 7%.
Solution
Books of Keshav Bros.
Dr.
Cr.
Expenses/Losses
Opening stock
Purchases
Less Returns
Wages
Carriage inwards
Factory rent
Gross profit c/d
2,50,000
(2,500)
Amount
Rs.
Revenue/Gains
60,000
Sales
Less Return
Closing stock
2,47,500
1,200
500
1,450
57,350
Amount
Rs.
3,00,000
(2,000) 2,98,000
70,000
3,68,000
Interest
Salary
Carriage outwards
Office Rent
Insurance
780
(200)
Depreciation on Plant and
Machinery
Commission
Bad debts
3,500
2,000
Add New provision
2,400
7,900
Less Old provision
(1,550)
Net Profit (transferred to
capital account)
2,000
2,500
700
2,300
3,68,000
Gross profit b/d
Rent received
10,380
Less Advance rent (6,000)
Commission received
57,350
4,380
16,000
580
1,125
7,800
19,600
500
6,350
34,275
77,730
77,730
2015-16
408
Accountancy
Liabilities
Creditors
Bills payable
Advance rent
Capital
Add Net profit
Amount
Rs.
2,20,000
34,275
Liabilities
Amount
Rs.
2,50,000
70,000
6,000
Cash In hand
Cash at bank
Bills receivable
22,500
35,000
3,000
2,54,275
Prepaid insurance
200
Debtors
50,000
Less Further
(2,000)
bad debts
48,000
Less New provision (2,400)
45,600
Plant and Machinery
1,22,200
Furniture
21,375
Buildings
2,60,400
Closing stock
70,000
5,80,275
5,80,275
Illustration 7
The following information have been taken from the trial balance of M/s Fair Brothers
Ltd. You are required to prepare the trading and profit and loss account and a balance
sheet as at March 31, 2014.
Debit Balances
Cash
Wages
Return outwards
Bad debts
Salaries
Octroi
Charity
Machinery
Debtors (Including a
dishonoured bill of Rs.1,600)
Stock
Purchases
Repairs
Interest on loan
Sales tax
Insurance
Rent
Amount
Rs.
20,000
45,050
4,800
4,620
16,000
1,000
250
32,000
60,000
Credit balances
Sales
Loan 12% (1.7.2013)
Discount received
Return (Purchase)
Creditors
Capital
Amount
Rs.
3,61,000
40,000
1,060
390
60,610
75,000
81,600
2,60,590
3,350
1,200
1,600
2,000
4,000
5,38,060
5,38,060
2015-16
409
Adjustments
1. Wages include Rs. 4,000 for erection of new machinery on April 01, 2013.
2. Provide 5% depreciation on furniture.
3. Salaried unpaid Rs.1,600.
4. Closing stock Rs. 81,850.
5. Create a provision at 5% on debtors.
6. Half the amount of bill is recoverable.
7. Rent is paid up to July 30, 2014.
8. Insurance unexpired Rs. 600.
Books of Fair Brothers Ltd.
Dr.
Cr.
Expenses/Losses
Opening stock
Purchases
Wages
Less Prepaid wages
including erection of
machines
Octroi
Gross profit c/d
Amount
Rs.
81,600
2,60,590
(390)
45,050
(4,000)
2,60,200
Revenue/Gains
Sales
Less Sales return
Closing stock
3,61,000
(4,800) 3,56,200
81,850
41,050
1,000
54,200
4,38,050
Salaries
Amount
Rs.
16,000
1,600
Repairs
Bad debts
Add New provision
Interest on loan
Add Outstanding interest
Sales tax
Insurance
Charity
Rent
Less Prepaid rent
Depreciation on machinery
capital account)
17,600
4,38,050
Gross profit b/d
Discount received
54,200
1,060
3,350
4,620
800
2,960
1,200
2,400
2,000
(600)
4,000
1,000
8,380
3,600
1,600
1,400
250
3,000
1,800
14,280
55,260
55,260
2015-16
410
Accountancy
Liabilities
Creditors
Loan
Capital
Add Net profit
Amount
Rs.
60,610
1,600
40,000
2,400
75,000
14,280
89,280
Assets
Cash
Debtors
60,000
Less Bad debts
(800)
Less Provision
2,960
Prepaid rent
Unexpired insurance
Machinery
32,000
Add Erection
4,000
Wages
36,000
Less Depreciation
(1,800)
Closing stock
1,93,890
Amount
Rs.
20,000
56,240
1,000
600
34,200
81,850
1,93,890
Illustration 8
From the following balance extracted from the books of of M/s Hariharan Brother, you are
require to prepare the trading and profit and loss account and a balance sheet as on December
31, 2015.
Debit balance
Opening stock
Purchases
Return inwards
Carriage inwards
Carriage outwards
Wages
Salaries
Rent
Freight and Dock
Fire Insurance premium
Bad debts
Discount
Rates and Taxes
Travelling expenses
Trade expenses
Business premises
Furniture
Bills receivable
Debtors
Machine
Loan
Investment
Cash in hand
Cash at bank
Proprietors withdrawal
Amount
Rs.
16,000
40,000
3,000
2,400
5,000
6,600
11,000
2,200
4,800
1,800
4,200
1,000
500
700
300
400
1,10,000
5,000
7,000
40,000
9,000
10,000
6,000
500
7,000
6,000
3,00,400
Credit balance
Capital
Sales
Return outwards
Apprenticeship premium
Bills payable
Creditors
Amount
Rs.
1,00,000
1,60,000
800
3,000
5,000
31,600
3,00,400
2015-16
411
Adjustments
2. Wages outstanding Rs. 600, Salaries Outstanding Rs. 1,000, Rent outstanding Rs. 200.
3. Fire Insurance premium includes Rs. 1,200 paid in July 01, 2014 to run for one year
from July 01, 2014 to June 30, 2015.
4. Apprenticeship Premium is for three years paid in advance on January 01, 2014.
5. Stationery bill for Rs. 60 remain unpaid.
6. Depreciation on Premises @ 5%, furniture @ 10%, Machinery @ 10%.
7. Interest on loan given accrued for one year @ 7%.
8. Interest on investment @ 5% for half year to December 31, 2014 has accrued.
9. Interest on capital to be allowed at 5% for one year.
10. Interest on drawings to be charged to him ascertained for the year Rs. 160.
Solution
Books of Hariharan Bros.
Trading and Profit and Loss Account for the year ended December 31, 2015
Dr.
Expenses/Losses
Opening stock
Purchases
Less purchases return
Wages
Add Outstanding Wages
Carriage inwards
Freight and Dock
Gross profit c/d
Amount
Rs.
16,000
40,000
(800)
6,600
600
Salaries
11,000
1,000
Carriage outwords
Rates and Taxes
500
Add Outstanding bill
60
Trade expenses
Travelling expenses
Fire insurance
1,800
(600)
Bad debts
Rent
2,200
Add Outstanding rent
200
Interest on capital
Depreciation on premises
Depreciation on machinery
Discount
capital account)
39,200
7,200
2,400
4,800
1,01,400
1,71,000
12,000
5,000
700
560
400
300
Revenue/Gains
Sales
Less Sales return
Closing stock
Cr.
Amount
Rs.
1,60,000
(3,000) 1,57,000
14,000
1,71,000
Gross profit b/d
1,01,400
Apprenticeship
3,000
premium
Less Advance premium (2,000)
1,000
Accrued interest on loan
700
160
Accrued interest on
150
investment
1,200
4,200
2,400
5,000
5,500
500
900
1,000
63,750
1,03,410
1,03,410
2015-16
412
Accountancy
Balance Sheet as at December 31, 2015

Amount Assets
Amount
Rs.
Rs.
Capital
1,00,000
Premises
1,10,000
5,000
Less Depreciation
(5,500) 1,04,500
Add Net profit
63,750
1,68,750
Furniture
4,500
Less drawings
(6,000)
1,62,750
Machinery
8,100
Less Interest on drawings (160) 1,62,590
Creditors
31,600 Debtors
40,000
Bills payable
5,000 Bills receivable
7,000
Outstanding wages
600 Cash in hand
500
1,000 Cash at bank
7,000
Outstanding rent
200 Loan
10,000
Outstanding stationery
60 Add accrued interest
700
10,700
Apprenticeship premium (advance)
2,000 Investments
6,000
Add accrued interest
150
6,150
Pre-paid insurance
600
Closing stock
14,000
2,03,050
2,03,050
Liabilities
Illustration 9
The following balances have been extracted from the trial balance of M/s Kolkata Ltd. You
are required to prepare the trading and profit and loss account on dated March 31, 2014.
Also prepare balance sheet on that date.
Debit balances
Opening stock
Furniture
Drawings
Cash in hand
Purchases
Sales return
Establishment expenses
Bad debts
Debtors
Carriage
Bills receivable
Bank deposits
Wages
Trade expenses
Bank charges
General expenses
Salaries
Insurance
Rent, Rates and Taxes
Coal, Gas, Water
Amount
Rs.
6,000
1,200
2,800
3,000
24,000
2,000
4,400
1,000
10,000
1,000
6,000
8,000
1,000
500
400
1,000
2,000
1,500
500
2,000
2,000
80,300
Credit balances
Capital
Sales
Purchases return
Bank overdraft
Bad debts provision
Creditors
Commission
Bills payable
Amount
Rs.
20,000
41,300
4,000
4,000
400
5,000
100
5,000
500
80,300
2015-16
413
Adjustments
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Outstanding salaries Rs. 100. Rent and taxes Rs. 200, Wages Rs. 100.
Unexpired insurance Rs. 500.
Commission is received in advances Rs. 50.
Interest Rs. 500 is to be received on bank deposits.
Interest on bank overdraft Rs. 750.
Depreciation on furniture @ 10%.
Closing stock Rs. 9,000.
Further bad debts Rs. 200 New provision @ 5% on debtors.
Apprenticeship premium received in advance Rs. 100.
Interest on drawings @ 6%.
Solution
Books of Kolkata Ltd.
Trading and Profit and Loss Account for the year ended as at March 31, 2014
Dr.
Cr.
Expenses /Losses
Opening stock
Purchases
Less purchases return
Wages
Coal, Gas, Water
Gross profit c/d
Amount
Rs.
6,000
24,000
(4,000)
1,000
100
20,000
Revenue/Gains
Sales
Less sales return
Closing stock
Amount
Rs.
41300
(2,000)
39,300
9,000
1,100
2,000
19,200
48,300
Carriage
Trade expenses
Bank charges
4,400
1,000
500
400
General expenses
Salaries
2,000
100
Insurance
1,500
(500)
Rent, rates and Taxes
Interest on bank overdraft
Bad debts
1,000
200
Add New provision
490
1,690
Less Old provision
(400)
capital account)
1,000
2,100
48,300
Gross profit b/d
Commission
100
Less Advance commission(50)
Accrued interest on
deposits
Apprenticeship premium 500
Less Advance received 100
19,200
50
500
400
168
1,000
500
2,200
750
1,290
120
5,058
20,318
20,318
2015-16
414
Accountancy
Liabilities
Amount
Rs.
Capital
Net profit
2,00,00
5,058
25,058
Less Drawings
(2,800)
22,258
Less Interest on drawings (168 )
Creditors
Commission received in advance
Insurance prepaid
Bank deposits
22,090
5,000
50
100
Outstanding wages
100
Outstanding rent,
rates, taxes
Bank overdraft
Add Outstanding interest
Bills payable
100
200
4,000
750
Assets
Amount
Rs.
500
8,000
Add outstanding interest 500
8,500
Furniture
Cash in hand
Debtors
10,000
Less Further
(200)
bad debts
9,800
Less Provision for
(490)
doubtful debts
Bills receivable
1,080
3,000
Closing stock
9,000
9,310
6,000
4,750
5,000
37,390
37,390
Illustration 10
Prepare the trading and profit and loss account of M/s Roni Plastic Ltd. from the following
trial balance and a balance sheet as at March 31, 2014.
Debit balances
Drawings
Sundry debtors
Carriage outwards
Interest on loan
Cash in hand
Stock
Motor car
Cash at bank
Land and Buildings
Bad debts
Purchases
Sales return
Advertisement
Carriage inward
Rates, taxes, insurance
General expenses
Bills receivable
Amount
Rs.
6,000
38,200
2,808
16,194
400
6,100
11,678
18,000
9,110
24,000
1,250
1,34,916
15,642
4,528
7,858
7,782
8,978
13,764
3,27,208
Credit balances
Creditors
Capital
Loan on mortgage
Bad debts provision
Sales
Purchases return
Discount
Bills payable
Rent received
Amount
Rs.
16,802
60,000
17,000
1,420
2,22,486
2,692
880
5,428
500
3,27,208
2015-16
415
Adjustments
1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.
2. Interest on loan is @ 5% taken on April 01, 2013.
3. Goods costing Rs1,200 were sent to a customer on sale on return basis for Rs.
1,400 on March 30, 2014 and has been recorded in the books as actual sales.
4. Salaries amounting to Rs. 1,400 and Rates amounting to Rs. 800 are due.
5. The bad debts provision is to be brought up to @ 5% on sundry debtors.
6. Closing stock was Rs. 13,700.
7. Goods costing Rs. 1,000 were taken away by the proprietor for his personal use but
not entry has been made in the books of account.
8. Insurance pre-paid Rs. 350.
9. Provide the managers commission at @ 5% on Net profit after charging such commission.
Solution
Books of Ronis Plastic Ltd.
Trading and Profit and Loss Account for the year ended March 31, 2014
Dr.
Cr.
Expenses/Losses
Amount Revenue/Gains
Amount
Rs.
Rs.
Opening stock
11,678 Sales
2,22,486
Purchases
1,34,916
Less Sales
15,642
return
2,06,844
2,692
Less Return basis
(1,400) 2,05,444
1,32,224
Less Goods withdrawn
(1,000) 1,31,224 Closing stock
13,700
Carriage inwards
7,858
Gross profit c/d
68,384
2,19,144
2,19,144
1,400 Gross profit b/d
68,384
Carriage outwards
2,808 Discount
880
16,194 Rent
500
Bad debts
1,250
Add New provision
1,840
3,090
Less Old provision
(1,420)
1,670
Rates and Taxes
7,782
Less Prepaid
(350)
7,432
Add Outstanding
800
8,232
Advertisement
4,528
Interest on loan
400
Add Outstanding Interest
450
850
General expenses
8,978
Depreciation on :
Land and Building
1,200
Motor car
2,700
3,900
Manager commission
1,010
20,194
capital account)
69,764
69,764
2015-16
416
Accountancy
Liabilities
Capital
Add Net profit
Less Drawings
Less Goods withdrawn
loan
Add interest
Bills payable
Amount
Rs.
60,000
20,194
80,194
(6,000)
(74,194)
1,000
17,000
73,194
450
17,450
5,428
Creditors
16,802
Outstanding Salaries
Outstanding Rates Taxes
Manager commission
1,400
800
1,010
Assets
Amount
Rs.
Cash in hand
6,100
Cash at bank
9,110
Bills receivable
Debtors
Less sales
return basis
Less New provisions
Land and Building
Less Depreciation
Motor car
Less Depreciation
Prepaid insurance
Closing stock
13,764
38,200
(1,400)
36,800
(1,840)
24,000
(1,200)
18,000
(2,700)
1,16,084
34,960
22,800
15,300
350
13,700
1,16,084
Do it yourself
1. From the following Trial Balance of M/s Karan on March 31, 2014, prepare
a Trading and Profit and Loss Account and a Balance Sheet:
Particulars
Dr. (Rs.)
Creditors/Debtors
2,05,000
96,000
10,000
9,600
50,000
Bills Payable/Bills Receivables

15% Loan
Sales/Purchases
Cr. (Rs.)
2,80,000
12,00,000
Discount
4,000
3,000
Bad Debt Recovered/Bad Debt
5,000
14,000
6,000
Interest on Investments
Interest on Loan
Vehicles
Stock
th
10% Investments (Purchased on 30 September, 2013)
8,000
4,000
6,50,000
3,00,000
1,80,000
Cash in hand
20,000
Cash at bank
37,000
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Capital /Drawings
9,000
4,50,000
Carriage on Purchases
1,600
Carriage on sales
4,400
Primary Packing Expenses
2,000
Rent
3,000
7,000
Insurance
3,600
Office & Administrative Expenses
4,000
Discount
2,000
3,000
60,000
4,000
10,000
10% Loan
Delivery Expenses
Selling and Distribution Expenses
Income Tax
2,000
Outstanding Salary
1,000
Sales Tax Collected
3,000
Apprenticeship Premium
6,000
Returns
1,000
4,000
Live Stock
53,000
Commission
10,000
12,000
18,68,600 18,68,600
(I)
Additional Information
(a) The cost of Closing stock was Rs. 50,000 but the market value was Rs.
40,000.
(b) Rent is due but not yet paid for March 2014 Rs. 500.
(c) Insurance carried forward Rs. 900.
(d) 1/3 of the commission received is in respect of work to be done in next
year and commission paid represents only 1/4 of the actual commission
to be paid during the year.
(e) Vehicles were valued at 90% of the book value.
(f) The Horse worth Rs. 30,000 was donated to a charitable organization.
(II) Name the accounting principles which will be followed while treating the
adjustment (a), (b) and (d) above?
(III) Which moral value has been observed in the adjustment (f) above by the
Karan?
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Accountancy
2. The following balances were extracted from the books of Avika Enterprises
on 31st March 2014.
Particulars
Capital
Drawings
General Expenses
Buildings
Machinery
Stock (1.4.2013)
Power
Taxes and Insurance
Wages
Debtors and Creditors
Charity
Bad debts
Bank Overdraft
Sales and Purchases
Stock (31.03.2014)
Motor Vehicles
Motor Vehicle expenses
Bad debt provision
Commission
Trade expenses
Bills payable
Cash
Total
Dr. (Rs.)
Cr. (Rs.)
2,000
2,500
21,000
9,340
16,200
2,240
1,315
7,200
6,280
105
550
13,500
23,500
2,000
500
1,280
100
24,500
2,500
11,180
65,360
900
1,320
3,850
1,09,610
1,09,610
You are required to :

(i) Prepare final accounts for the year ended March 31, 2014 after giving effect
to the following adjustments:
(a) 1/5th of General expenses and Taxes & Insurance to be charged to factory
and the balance to the office.
(b) Write off a further Bad debts of Rs. 160 and maintain the provision for
bad debts at 5% and create a provision for discount on Debtors at 10%.
(c) Depreciate Machinery at 10% and Motor Vehicles by Rs. 240
(d) Provide Rs. 700 for interest on Bank Overdraft to be paid.
(e) Rs. 50 is to be carried forward to next year out of Insurance.
(f) Provide for Managers Commission at 10% on the Net Profit after
charging such commission.
(ii)
Name the accounting principles will be followed while treating the

adjustment (a), (b) and (d) above?
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(iii) Which moral value has been observed in the adjustment (f) above by the
Karan?
3. The following balances were extracted from the books of Anushka Enterprises
on March 31, 2014.
Particulars
Dr. (Rs.)
Creditors
Loan from SBI
Sales
Debtors
Dividend Received on Shares
Bad Debt
Bad Debt Recovered
Bills Receivables
Interest on Loan
Goodwill
Purchases
Stock (1.4.2013)
Cash at Bank
Factory Repairs
Capital
Audit Fees
Petty Expenses
Salary
Life Insurance Premium
Premises
Insurance
Sales Returns
Employees Provident Fund
Provision for Doubtful Debts
Delivery Expenses
Dock Charges (Outward)
Packing Charges
Advance Salary
Warehouse Insurance
Loss in Exchange
Bank Charges
Bonus from Suppliers
Purchases Returns
Machinery
Discounting Bills of Exchange
2,00,000
2,00,000
12,30,000
2,00,000
20,000
2,000
12,000
1,50,000
50,000
4,00,000
2,10,000
1,00,000
3,00,000
40,000
7,24,000
6,000
4,000
70,000
15,000
4,00,000
25,000
12,000
60,000
75,000
8,000
6,000
17,000
30,000
13,000
9,000
5,000
3,45,000
10,000
8,00,000
1,000
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Accountancy

(i) Prepare final accounts for the year ended March 31, 2014 after giving effect
(a) Insurance is due but not yet paid for March 2014 Rs. 500.
(b) Salary Unexpired Rs. 900.
(c) Write off a further Bad debts Rs. 2,000 and maintain the provision for
bad debts at 5% on Debtors.
(d) Machinery is to be valued at 90% less than the book value.
(e) Goods kept in warehouse worth Rs. 10,0000 were used for staff welfare.
(f) Half of the Bills Receivable were irrecoverable.
(h) Closing Stock is Rs. 40,000
(ii)
Name the accounting principles which will be followed while treating the
adjustment (a), (b), (c) and (d) above?
(iii) Which moral value has been observed in the adjustment (e) above by the
Anushka Enterprises?
4. The following balances were extracted from the books of Avika Enterprises
on March 31, 2014.
Particulars
Capital
Cash
Purchases
Sales
Bank
Plant
Freehold Land
Heating and Lighting
Bills Receivables
Return Inwards
Salaries
Creditors
Debtors
Stock (as on 01.04.2013)
Printing
Bills Payable
Taxes
Discount Received
Commission (Dr.)
Trucks
Furniture
Wages
Drawings
Returns Outward
Dr. (Rs.)
Cr. (Rs.)
17,980
1,770
450
3,000
130
2,150
11,400
6,000
450
3,750
380
890
25,000
2,00,000
400
1,92,680
60
22,120
1,650
60
63,780
800
12,000
340
2,73,750
2,93,490
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(i)
Redraft the Trial Balance (Correct total of Trial Balance Rs. 2,83,620)
(ii)
Prepare final accounts for the year ended March 31, 2014 after giving effect
(a) Taxes are paid for 10 months only.
(b) Creditors worth Rs. 780 have accepted Bills Payables.
c) Depreciate furniture by 10%.
(d) Trucks were depreciated to the extent of Rs. 21,000.
(e) Wages includes Rs. 2,000 for the making of Furniture.
(f) Closing Stock is of Rs. 20,000.
(g) Provide for Managers Commission at 10% on the Net Profit before
(h) Land was acquired on 1st April, 2013 by paying a claim at 50% less
than market value to the farmers.
(iii) Name the accounting principles which will be followed while treating the
adjustment (a), (c) and (e) above?
(iv) State which moral value has been violated in the adjustment (h) above by
Anika Enterprises?
Key Terms Introduced in the Chapter
Outstanding /Accrued expenses

Accrued Incomes
Depreciation
Managers Commission
Prepaid/Unexpired expenses
Income received in advance
Bad Debts
Provision for discount on
debtors
Interest on Capital
Summary with Reference to Learning Objectives

1
Need for adjustments : For the preparation of financial statements, it is

necessary that all the adjustments arising out of the accrual basis of accounting
are made at the end of the accounting period. Another important consideration
in the preparation of final accounts with adjustments, is the distinction
between capital and revenue items. Entries which are recorded to give effect to
these adjustments are known as adjusting entries.
Outstanding expenses : At the end of the accounting period sometimes a business
enterprises is left with some unpaid expenses due to one reason or another.
Such expenses are termed as outstanding expenses.
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Accountancy
3.
4.
5.
Prepaid expenses : At the end of the accounting year, it is found that the
benefits of some expenses have not been fully received; a portion of total
benefits would be received in the next accounting year. That portion of the
expense, the benefit of which will be received during the next accounting
period is known as prepaid expenses.
Accrued Income : These are certain items is received by a business enterprise
but the whole amount of it does not belong to the next period. Such portion of
income which belongs to the next accounting period is income received in
advance and is known as unearned income.
Depreciation : Depreciation is the decline in the value of an asset an account
of wear and tear or passage of time or with. It actually amounts to writing off
a portion of the cost of an asset which has been used in the business for the
purpose of earning profits. In the balance sheet, the asset is shown at loss
minus the amount of depreciation.
Provisions for bad and doubtful debts : It is a normal feature of business
operations that some debts prove irrecoverable which means that the amount
to the realised from them becomes had to view of this. An attempt is made to
bring in a certain element of certainty in the amount in respect of bad debts
charged every year against incomes.
Questions for Practice
Short Answers
1. Why is it necessary to record the adjusting entries in the preparation of
final accounts?
2. What is meant by closing stock? Show its treatment in final accounts?
3. State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
4. Give the Performa of income statement and balance in vertical form.
5. Why is it necessary to create a provision for doubtful debts at the time of
preparation of final accounts?
6. What adjusting entries would you record for the following :
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Managers commission
7. What is meant by provision for discount on debtors?
8. Give the journal entries for the following adjustments :
(a) Outstanding salary Rs. 3,500.
(b) Rent unpaid for one month at Rs. 6,000 per annum.
(c) Insurance prepaid for a quarter at Rs. 16,000 per annum.
(d) Purchase of furniture costing Rs. 7,000 entered in the purchases book.
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Long Answers
1. What are adjusting entries? Why are they necessary for preparing final
accounts?
2. What is meant by provision for doubtful debts? How are the relevant accounts
prepared and what journal entries are recorded in final accounts? How is the
amount for provision for doubtful debts calculated?
3. Show the treatment of prepaid expenses depreciation, closing stock at the
time of preparation of final accounts when:
(a) When given inside the trial balance?
(b) When given outside the trial balance?
Numerical Questions
1. Prepare a trading and profit and loss account for the year ending March 31,
2014. from the balances extracted of M/s Rahul Sons. Also prepare a balance
sheet at the end of the year.
Account Title
Stock
Wages
Salary
Purchases
Sales return
Sundry Debtors
Discount allowed
Insurance
Rent Rates and Taxes
Fixtures and fittings
Trade expenses
Bad debts
Drawings
Repair and renewals
Travelling expenses
Postage
Telegram expenses
Legal fees
Bills receivable
Building
Amount
Rs.
Account Title
Amount
Rs.
50,000
3,000
8,000
1,75,000
3,000
82,000
1,000
3,200
4,300
20,000
1,500
2,000
32,000
1,600
4,200
300
200
500
50,000
1,10,000
Sales
1,80,000
Purchases return
2,000
Discount received
500
2,500
Capital
3,00,000
Bills payable
22,000
Commission received
4,000
Rent
6,000
Loan
34,800
5,51,800
5,51,800
Adjustments
1. Commission received in advance Rs.1,000.
2. Rent receivable Rs. 2,000.
3. Salary outstanding Rs. 1,000 and insurance prepaid Rs. 800.
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Accountancy
4. Further bad debts Rs. 1,000 and provision for doubtful debts @ 5% on
debtors and discount on debtors @ 2%.
6. Depreciation on building @ 6% p.a.
(Ans : Gross loss Rs.17,000 ; Net loss Rs.43,189 ; Total balance sheet
Rs.2,83,611)
2. Prepare a trading and profit and loss account of M/s Green Club Ltd. for
the year ending March 31, 2014. from the following figures taken from his
trial balance :
Account Title
Opening stock
Purchases
Return inwards
Salary
Wages
Rent and Rates
Packing and Transport
General expense
Insurance
Debtors
Cash in hand
Cash at bank
Machinery
Lighting and Heating
Discount
Bad debts
Investment
Amount
Rs.
35,000
1,25,000
25,000
600
12,300
3,000
1,000
500
400
4,000
50,000
20,000
40,000
20,000
5,000
3,500
3,500
23,100
3,71,900
Account Title
Sales
Purchase return
Creditors
Bills payable
Discount
Interest received
Capital
Amount
Rs.
2,50,000
6,000
10,000
20,000
1,000
4,500
5,400
75,000
3,71,900
Adjustments
1. Depreciation charged on machinery @ 5% p.a.
2. Further bad debts Rs.1,500, discount on debtors @ 5% and make a
provision on debtors @ 6%.
3. Wages prepaid Rs.1,000.
4. Interest on investment @ 5% p.a.
5. Closing stock 10,000.
(Ans. : Gross Profit Rs.79.000 ; Net Profit Rs.52,565 ; Total Balance Sheet
Rs.1,57,565).
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3 The following balances has been extracted from the trial of M/s Runway
Shine Ltd. Prepare a trading and profit and loss account and a balance sheet
as on March 31, 2014.
Account Title
Purchases
Opening stock
Return inwards
Carriage inwards
Cash in hand
Cash at bank
Wages
Discount
Bad debts
Insurance
Investment
Debtors
Bills receivable
Postage and Telegraph
Commission
Interest
Repair
Lighting Charges
Telephone charges
Carriage outward
Motor car
Amount
Rs.
1,50,000
50,000
2,000
4,500
77,800
60,800
2,400
4,500
400
1,500
2,500
32,000
53,000
20,000
400
200
1,000
440
500
100
400
25,000
4,89,440
Account Title
Sales
Return outwards
Interest received
Discount received
Creditors
Bill payable
Capital
Amount
Rs.
2,50,000
4,500
3,500
400
1,25,000
6,040
1,00,000
4,89,440
Adjustments
1. Further bad debts Rs. 1,000. Discount on debtors Rs. 500 and make a
provision on debtors @ 5%.
2. Interest received on investment @ 5%.
3. Wages and interest outstanding Rs. 100 and Rs. 200 respectely.
4. Depreciation charged on motor car @ 5% p.a.
5. Closing Stock Rs. 32,500.
(Ans. : Gross profit Rs. 78,000 ; Net profit Rs. 66,060, Total balance sheet
Rs. 2,97,400)
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Accountancy
4. The following balances have been extracted from the trial of M/s Haryana
Chemical Ltd. You are required to prepare a trading and profit and loss account
and balance sheet as on March 31, 2014 from the given information.
Account Title
Opening stock
Purchases
Sales return
Cash in hand
Cash at bank
Carriage
Free hold land
Patents
General Expenses
Sundry Debtors
Building
Machinery
Insurance
Drawings
Motor vehicle
Bad debts
Light and Water
Trade expenses
Power
Salary and Wages
Loan a 15% (01.09.2013)
Amount
Rs.
50,000
1,25,500
2,000
21,200
12,000
100
3,20,000
1,20,000
2,000
32,500
86,000
34,500
12,400
10,000
10,500
2,000
1,200
2,000
3,900
5,400
3,000
8,56,200
Account Title
Sales
Purchases return
Creditors
Rent
Interest
Bills payable
Capital
Amount
Rs.
3,50,000
2,500
25,000
5,000
2,000
1,71,700
3,00,000
8,56,200
Adjustments
1. Closing stock was valued at the end of the year Rs. 40,000.
2. Salary amounting Rs. 500 and trade expense Rs. 300 are due.
3. Depreciation charged on building and machinery are @ 4% and @ 5%
respectively.
4. Make a provision of @ 5% on sundry debtors.
(Ans. : Gross profit Rs. 2,11,000 ; Net profit Rs.1,85,560 ; Total balance
sheet Rs.6,73,060)
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5. From the following information prepare trading and profit and loss account
of M/s Indian sports house for the year ending March 31, 2014.
Account Title
Drawings
Sundry debtors
Bad debts
Trade Expenses
Rent Rates and Taxes
Feright
Return inwards
Opening stock
Purchases
Furniture and Fixture
Plant and Machinery
Bills receivable
Wages
Cash in hand
Discount allowed
Investments
Motor car
Amount
Rs.
20,000
80,000
1,000
2,400
2,000
5,000
4,000
7,000
25,000
1,80,000
20,000
1,00,000
14,000
10,000
6,000
2,000
40,000
51,000
5,69,400
Account Title
Capital
Return outwards
Bank overdraft
Sundry creditors
Bills payable
Sales
Amount
Rs.
2,00,000
2,000
12,000
4,000
60,000
15,400
2,76,000
5,69,400
Adjustments
1. Closing stock was Rs.45,000.
2. Provision for doubtful debts is to be maintained @ 2% on debtors.
3. Depreciation charged on : furniture and fixture @ 5%, plant and
Machinery @ 6% and motor car @ 10%.
4. A Machine of Rs.30,000 was purchased on July 01, 2013.
5. The manager is entitle to a commission of @ 10% of the net profit after
(Ans. : Gross profit Rs.1,01,000 ; Net profit Rs.68,909 ; Total balance sheet
Rs. 3,43,200 ; Managers commission Rs.6,891)
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Accountancy
6. Prepare the trading and profit and loss account and a balance sheet of M/s
Shine Ltd. from the following particulars.
Account Title
Sundry debtors
Bad debts
Trade expenses
Printing and Stationary
Rent, Rates and Taxes
Freight
Sales return
Motor car
Opening stock
Furniture and Fixture
Purchases
Drawings
Investments
Cash in hand
Cash in bank
Amount
Rs.
1,00,000
3,000
2,500
5,000
3,450
2,250
6,000
25,000
75,550
15,500
75,000
13,560
65,500
36,000
53,000
4,81,310
Account Title
Bills payable
Sundry creditors
Return outwards
Capital
Discount received
Interest received
Sales
Amount
Rs.
85,550
25,000
1,500
4,500
2,50,000
3,500
11,260
1,00,000
4,81,310
Adjustments
1. Closing stock was valued Rs. 35,000.
2. Depreciation charged on furniture and fixture @ 5%.
3. Further bad debts Rs. 1,000. Make a provision for bad debts @ 5% on
sundry debtors.
4. Depreciation charged on motor car @ 10%.
5. Interest on drawing @ 6%.
6. Rent, rates and taxes was outstanding Rs.200.
7. Discount on debtors 2%.
(Ans. : Gross loss Rs,17,050 ; Net loss Rs.27,344 ; Total balance sheet
Rs. 3,19,032).
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429
Following balances have been extracted from the trial balance of M/s Keshav
Electronics Ltd. You are required to prepare the trading and profit and loss
account and a balance sheet as on March 31, 2014.
Account Title
Opening stock
Purchases
Drawings
Buildings
Motor van
Freight inwards
Sales return
Trade expense
Heat and Power
Salary and Wages
Legal expense
Bad debts
Cash in hand
Cash at bank
Sundry debtors
Investments
Insurance
Machinery
Amount
Rs.
2,26,000
4,40,000
75,000
1,00,000
30,000
3,400
10,000
3,300
8,000
5,000
3,000
1,000
6,500
79,000
98,000
25,000
40,000
3,500
22,000
Account Title
Sales
Return outwards
Creditors
Bills payable
Interest receivced
Capital
11,78,700
Amount
Rs.
6,80,000
15,000
50,000
63,700
20,000
3,50,000
11,78,700
The following additional information is available :

1. Stock on March 31, 2014 was Rs. 30,000.
2. Depreciation is to be charged on building at 5% and motor van at 10%.
3. Provision for doubtful debts is to be maintained at 5% on Sundry
Debtors.
4. Unexpired insurance was Rs. 600.
5. The Manager is entitled to a commissiion @ 5% on net profit before
(Ans. : Gross profit Rs,37,600 ; Net profit Rs.25,381 ; Total balance sheet
Rs.4,15,350 ; Managers commission Rs.1,269)
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Accountancy
8. From the following balances extracted from the books of Raga Ltd. prepare
a trading and profit and loss account for the year ended March 31, 2014
and a balance sheet as on that date.
Account Title
Drawings
Land and Buildings
Plant and Machinery
Carriage inwards
Wages
Salary
Sales return
Bank charges
Coal, Gas and Water
purchases
Trade Expenses
Stock (Opening)
Cash at bank
Rates and Taxes
Bills receivable
Sundry debtors
Cash in hand
Amount
Rs.
20,000
12,000
40,000
100
500
2,000
200
200
1,200
1,50,000
3,800
76,800
50,000
870
24,500
54,300
30,000
4,66,470
Account Title
Sales
Capital
Discount
Apprentice premium
Bills payable
Purchases return
Amount
Rs.
2,20,000
1,01,110
1,260
5,230
1,28,870
10,000
4,66,470
The additional information is as under :

1. Closing stock was valued at the end of the year Rs, 20,000.
2. Depreciation on plant and machinery charged at 5% and land and
building at 10%.
3. Discount on debtors at 3%.
4. Make a provision at 5% on debtors for doubtful debts.
5. Salary outstanding was Rs.100 and Wages prepaid was Rs. 40.
6. The manager is entitled a commission of 5% on net profit after charging
such commission.
(Ans. : Gross profit Rs,21,240 ; Net profit Rs.12,664 ; Total balance sheet
Rs.2,23,377 ; Managers commission Rs.633)
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9. From the following balances of M/s Jyoti Exports, prepare trading and
profit and loss account for the year ended March 31, 2014 and balance
sheet as on this date.
Account Title
Sundry debtors
Opening stock
Purchases
Carriage inwards
Wages
Office rent
Insurance
Factory rent
Cleaning charges
Salary
Building
Plant and Machinery
Cash in hand
Gas and Water
Octroi
Furniture
Patents
Debit
Amount
Rs.
Account Title
9,600
22,800
34,800
450
1,770
820
1,440
390
940
1,590
24,000
3,600
2,160
240
60
20,540
10,000
Sundry creditors
Sales
Purchases returns
Bills payable
Capital
1,35,200
Credit
Amount
Rs.
2,500
72,670
2,430
15,600
42,000
1,35,200
Closing stock Rs.10,000.

1. To provision for doubtful debts is to be maintained at 5 per cent on sundry
debtors.
2. Wages amounting to Rs.500 and salary amounting to Rs. 350 are
outstanding.
3. Factory rent prepaid Rs. 100.
4. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.
5. Outstanding insurance Rs.100.
(Ans : Gross profit Rs.23,250 ; Net profit Rs.16,370 ; Total balance Sheet 63,530)
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Accountancy
10. The following balances have been extracted from the books of M/s Green
House for the year ended March 31, 2014, prepare trading and profit and
loss account and balance sheet as on this date.
Account Title
Amount
Rs.
Purchases
Bank balance
Wages
Debtors
Cash in hand
Legal expenses
Building
Machinery
Bills receivable
Office expenses
Opening stock
Gas and fuel
Freight and Carriage
Factory lighting
Office furniture
Patent right
80,000
11,000
34,000
70,300
1,200
4,000
60,000
120,000
7,000
3,000
45,000
2,700
3,500
5,000
5,000
18,800
4,70,500
Account Title
Capital
Bills payable
Sales
Creditors
Return outwards
Amount
Rs.
2,10,000
6,500
2,00,000
50,000
4,000
4,70,500
adjustments :
(a) Machinery is depreciated at 10% and buildings depreciated at 6%.
(b) Interest on capital @ 4%.
(c) Outstanding wages Rs. 50.
(d) Closing stock Rs.50,000.
(Ans : Gross profit Rs.83,750 ; Net Profit Rs.52,750 ; Total balance sheet
Rs.3,19,250).
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11. From the following balances extracted from the book of M/s Manju Chawla
on March 31, 2014. You are requested to prepare the trading and profit and
loss account and a balance sheet as on this date.
Account Title
Amount
Rs.
Opening stock
Purchases and Sales
Returns
Wages
Dock and cleaning charges
Lighting
Misc. Income
Rent
Capital
Drawings
Cash
Investment
Patent
Land and Machinery
Donations and Charity
Sales tax collected
Furniture
10,000
40,000
200
6,000
4,000
500
Amount
Rs.
80,000
600
6,000
2,000
40,000
2,000
6,000
3,000
6,000
4,000
43,000
600
7,000
1,000
11,300
1,36,600
1,36,600
Closing stock was Rs.2,000.

(a) Interest on drawings @ 7% and interest on capital @ 5%.
(b) Land and Machinery is depreciated at 5%.
(c) Interest on investment @ 6%.
(d) Unexpired rent Rs.100.
(e) Charge 5% depreciation on furniture.
(Ans. : Gross profit Rs.30,900 ; Net profit Rs.26,185 ; Total balance sheet
Rs.71,185).
2015-16
434
Accountancy
12. The following balances were extracted from the books of M/s Panchsheel
Garments on March 31, 2014.
Account Title
Debit
Amount
Rs.
Account Title
Opening stock
Purchases
Return Inwards
Carriage inwards
General expenses
Insurance
Scooter expenses
Salary
Cash in hand
Scooter
Furniture
Buildings
Debtors
Wages
16,000
67,600
4,600
1,400
2,400
4,000
200
8,800
4,000
8,000
5,200
65,000
6,000
1,200
Sales
Return outwards
Discount
Bank overdraft
Commission
Creditors
Capital
1,94,400
Credit
Amount
Rs.
1,12,000
3,200
1,400
10,000
1,800
16,000
50,000
1,94,400
Prepare the trading and profit and loss account for the year ended March 31,
2014 and a balance sheet as on that date.
(a) Unexpired insurance Rs 1,000.
(b) Salary due but not paid Rs. 1800.
(c) Wages outstanding Rs. 200.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated Rs.@ 10%.
(Ans. : Gross profit Rs.39,200 ; Net profit Rs.22,780 ; Total balance sheet
Rs.98,780}.
2015-16
435
13. Prepare the trading and profit and loss account and balance sheet of M/s
Control Device India on March 31, 2014 from the following balance as on
that date.
Account Title
Debit
Amount
Rs.
Credit
Amount
Rs.
Drawings and Capital

Purchase and Sales
Salary and Commission
Carriage
Plant and Machinery
Furniture
Opening stock
Insurnace premium
Interest
Bank overdraft
Rent and Taxes
Wages
Returns
Carriage outwards
General expenses
Octroi
Investment
19,530
45,000
25,470
2,700
27,000
6,750
42,300
2,700
67,500
1,12,500
1,575
7,425
24,660
2,160
11,215
2,385
1,485
36,000
6,975
530
41,400
2,73,600
1,440
58,500
2,73,600
Closing stock was valued Rs. 20,000.

(a)
(b)
(c)
(d)
(e)
(f)
Interest on capital @ 10%.

Interest on drawings @ 5%.
Wages outstanding Rs.50.
Outstanding salary Rs.20.
Provide a depreciation @ 5% on plant and machinery.
Make a 5% provision on debtors.
(Ans. : Gross profit Rs.29,760 ; Net loss Rs.8,973 ; Total balance sheet Rs.1,28,000)
14. The following balances appeared in the trial balance of M/s Kapil Traders
as on March 31, 2014
Sundry debtors
Bad debts
Rs.
30,500
500
2,000
2015-16
436
Accountancy
The partners of the firm agreed to records the following adjustments in the books of
the Firm: Further bad debts Rs.300. Maintain provision for bad debts 10%. Show
the following adjustments in the bad debts account, provision account, debtors
account, profit and loss account and balance sheet.
(Ans ; Dr. Profit and Loss account Rs.1,820)
15. Prepare the bad debts account, provision for account, profit and loss account and
balance sheet f rom the following information as on March 31, 2014
Debtors
Bad debts
Rs.
80,000
2,000
5,000
Adjustments :
Bad debts Rs.500 Provision on debtors @ 3%.
(Ans : Credit Profit and Loss account Rs.115)
Checklist to Test Your Understanding

1. (c), 2. (d), 3. (b), 4. (a), 5. (d)
2015-16

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372

n chapter 9, you learnt about the preparation of

It may be noted that when we prepare the financial statements, we are

Gross profit b/d

10.3 Outstanding Expenses

Gross profit b/d

10.4 Prepaid Expenses

10.5 Accrued Income

Commission received 5,000

10.6 Income Received in Advance

Commission received 5,000

10.8 Bad Debts

Commission received 5,000

Balance Sheet of Ankit as at March 31, 2014

Current Liabilities and Provisions

10.9 Provision for Bad and Doubtful Debts

of this amount may not be realised in future. However, it is not possible to

Commission received 5,000

Current Liabilities & Provisions

In this case, the following journal entries will be recorded :

(b) Provision for doubtful debts A/c Dr.

Profit and Loss A/c

Profit and Loss Account

*Only relevant items.

*Only relevant items.

10.10 Provision for Discount on Debtors

Commission received 5,000

Balance Sheet of Ankit as on March 31, 2014

Current Liabilities & Provisions

Rent received in advance

In the subsequent year, the discount will be transferred to the provision

The managers commission will be adjusted in the books of account by

Commission received 5,000

Balance Sheet of Ankit as at March 31, 2014

(ii) Trading and Profit and Loss Account of Ankit

Gross profit b/d

Commission received 5,000

Current Liabilities and Provisions

10.12 Interest on Capital

Closing stock A/c

Shown on the credit Shown on the

Prepaid expense A/c

Deducted from the

4. Income earned Accured income A/c

5. Income received Income A/c

Deducted from the

Shown on the debit

Shown on the debit

Profit and Loss A/c

Shown on the debit

Shown on the debit

Shown on the debit

11. Further bad

Bad debts A/c

Shown on the debit

Fig. 10.2 : Showing treatment of various types of adjustments

Closing stock Rs. 70,000

Gross profit b/d