Financial and Management Accounting Unit 6

Unit 6 Final Accounts

Structure:
6.1 Introduction
Objectives
6.2 Components of Final Accounts
Trading and profit and loss account
Balance sheet
6.3 Adjustments
Outstanding expenses
Prepaid expenses
Incomes received in advance
Accrued incomes
Depreciation
Bad debts and accounting treatment of bad debts
Provision for doubtful debts
Reserves for discount on debtors
Reserves for discount on creditors
Closing stock
6.4 Adjusted Trial Balance
6.5 Final Accounts of Joint Stock Companies
6.6 Summary
6.7 Glossary
6.8 Terminal Questions
6.9 Answers
6.10 Case Study

6.1 Introduction
In the previous units we have understood the first two functions of
accounting.
• Recording – through journal and subsidiary books
• Classifying – through ledger accounts
In this unit, we will understand the next function of accounting,
i.e., summarising. The end objective of any business is profit. All the
stakeholders would like to know whether all the transactions incurred
throughout an accounting period resulted in profit or loss for their business.

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This process of taking a summary of all transactions incurred during an

accounting period with the objective of knowing the net result of all such
transactions is called summarising.
Summarising can be done by preparing the following two statements.
• Profit and loss account
• Balance sheet
These two statements together comprise the final accounts. They are called
final accounts as they are prepared at the end of the accounting period.
They are also popularly called financial statements.
In this unit, we will learn how to prepare the final accounts.
Objectives:
After studying this unit, you should be able to:
• describe the meaning of final accounts and appreciate the need for and
importance of final accounts
• describe the components and structure of final accounts
• prepare the final accounts from a given trial balance
• analyse adjustments and the different types of adjustments
• identify how to incorporate adjustments into final accounts through
adjusted trial balance and also directly in the final accounts
• analyse the features of and prepare the final accounts of joint stock
companies

6.2 Components of Final Accounts

As mentioned earlier, final accounts have two components.
• Profit and loss account
• Balance sheet
Let us discuss the two components in detail.
Profit and loss account
It is a statement prepared in order to know the financial performance (profit
or loss) for an accounting period (usually one year). This statement basically
shows the net effect of total revenues and total expenses.

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That is,
Profit = Total revenues - Total expenses
If the total revenues are more than total expenses there is profit.
If the total expenses are more than total revenues there is loss.

6.2.1 Trading and Profit and loss account has the following two
sections
• Trading account
• Profit and loss account
Let us now discuss the two sections in detail.
Trading account
It shows the gross profit or gross loss arising out of trading activities. Trade
means buying and selling. The trading account shows the results of core
operations of the business i.e., buying and selling. The expenses related to
core operations of the business are called direct expenses and the incomes
arising out of core operations of the business are called direct incomes. The
excess of direct incomes over direct expenses is called gross profit and
excess of direct expenses over direct incomes is called gross loss. The
gross profit or gross loss is transferred to the profit and loss account.
The format of a trading account is given below:

Dr Trading Account for the year ending- - - - Cr

Particulars Rs. Particulars Rs.
To opening stock By sales
To purchases Less returns
inwards/sales returns
Less purchase returns/returns outwards By closing stock
To carriage inwards
To freight and octroi
To wages
Add outstanding wages
Less prepaid wages
To fuel and power

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To gas, coal, electricity for production

To import duty and clearing charges
To stores consumed
To factory rent, insurance, factory
expenses
To other direct expenses
To royalty paid
To profit and loss a/c (gross profit)

Illustration 1: For the following balances extracted from a trial balance,

prepare a trading account.
Particulars Amount in Rs.
Stock on 1-1-2004 70700
Returns inwards 3000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials received from abroad 6000
Clearing charges 7000
Rent of business shop 12000
Royalty paid to extract materials 10000
Fire insurance on stock 2000
Wages paid to workers 8000
Office salaries 10000
Cash discount 1000
Gas, electricity, and water 4000
Sales 250000

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Solution
Dr Trading Account For the Year Ending - - - Cr
Particulars Rs. Particulars Rs.
To stock on 1-1-2004 70700
To Purchases 102000 By sales 250000
(-) Returns (-) Returns
Outwards 3000 99000 Inwards 3000 247000
To Carriage inwards 5000
To Import duty 6000
To Clearing charges 7000
To Royalty 10000
To Fire insurance 2000
To Wages 8000
To Gas, electricity, water 4000
To Gross profit 35300
Total 247000 Total 247000

Profit and loss account

It is an important account that reveals the net result of the business in the
form of net profit or net loss. All revenue receipts are received regularly out
of day to day activities of the business. Revenue payments that are incurred
are recorded in profit and loss account. The capital receipts and capital
payments are not considered while preparing profit and loss account as they
do not form a part of this account.
The format of a profit and loss account is given below:

Dr Profit and Loss Account for the year ending --- Cr

Particulars Particulars Rs.
Rs.
To Trading account (GL) By Trading account (GP)
To Salaries + Outstanding –Prepaid By Interest earned +
salaries as per adjustments Accrued interest as per
adjustments
To Rent of the premises By Commission earned
To Travelling expenses By Discount earned

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To Rates and Taxes By Rent received

To Printing and stationery By Bad debts recovered
To Postage and Telegram By Interest on drawings
To Telephone charges By Reserve for discount on
Creditors
To Insurance – Prepaid amount as By Dividends received
per adjustment
To Interest paid By Royalty Received
To Discount allowed By Capital Account( Net
Loss)
To Sundry expenses
To Advertisement
To Commission
To Carriage outwards
To Bad Debts
To Reserve for bad debts
To Reserve for discount on Debtors
To Depreciation
To Legal charges
To Audit fee
To Interest on Capital
To Capital Account (Net Profit)

6.2.2 Balance sheet

Balance sheet is a financial statement that shows the financial position
(i.e., the assets, liabilities, and capital) of the business as on a particular
date. Normally the balance sheet is drawn on the last day of the year (the
closing date). The assets and liabilities may be presented in the balance
sheet in any one of the following orders.
• Order of permanency
• Order of liquidity
Under the order of permanency, the assets are presented starting from the
most permanent asset (fixed assets) to the least permanent asset (current
assets). Similarly, the liabilities are presented starting from the most
permanent liability (capital) to the least permanent liability (current liabilities).

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The order of liquidity is the opposite of the order of permanency. The assets
are presented starting from the least permanent asset (current assets) to the
most permanent asset (fixed assets). Similarly, the liabilities are presented
starting from the least permanent liability (current liabilities) to the most
permanent liability (capital).

Sole proprietary organisations and partnership firms may use any of the
above methods. However the joint stock companies have to use only the
order of permanency for reporting purposes.

The format of a balance sheet as per the order of permanency is given

below.

Balance Sheet as on ……..

Liabilities Rs. Assets Rs.
Capital Fixed Assets
Opening balance Land
+net profit Buildings
(-net loss) Plant and machinery
+interest on capital Furniture and fixtures
- Drawings Vehicles
- Interest on drawings Current assets
Closing balance Stock
Long term liabilities Sundry debtors
Current liabilities B/R
Sundry creditors Cash at bank
B/P Cash in hand
Outstanding expenses Prepaid expenses
Incomes received in advance Accrued incomes
Total Total

6.3 Adjustments
Certain transactions may occur after ledger accounts have been closed and
trial balance has been drafted. However, such transactions must be
provided before preparing the final accounts if they belong to the current
year. Such entries are called adjustments.

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6.3.1 Outstanding expenses

Expenses yet to be paid or outstanding expenses for the current period
should be charged against the income of the current period.
6.3.2 Prepaid expenses
Expenses paid in advance or prepaid expenses should be not be charged
against the revenues related to the current period but it must be taken to the
coming period.
6.3.3 Income received in advance
Income received in advance that does not belong to the current period
should not be considered.
6.3.4 Accrued income
Accrued income is also called outstanding income. Income yet to be
received for the current period should be considered as income for the
current period irrespective of whether it is actually received in cash or not.

Self Assessment Questions

1. Expenses due but not yet paid are known as ______.
2. Prepaid expenses appear on the asset side of the balance sheet.
(True/False)
3. Income earned but not received is called ____________.
6.3.5 Depreciation
Depreciation is a reduction in the value of an asset.
The reasons could be wear and tear, permanent fall of market price of the
asset, or outdated technology. Depreciation must be treated as a cost.
Therefore, the amount of depreciation must be deducted from the asset and
debited to the profit and loss account.
6.3.6 Bad debts
Bad debts are those debts which are not recovered. Bad debts form loss to
the business. The amount of bad debts must be deducted from the debtors
and debited to the profit and loss account.
6.3.7 Provision for doubtful debts
From the past experience of the business proprietor, what percentage of
debts may become bad in the future can be estimated. In the current year,

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an equal amount of profit is set aside. This provision is also known as

Reserve for Bad Debts (RBD) or Provision for Doubtful Debts or Reserve for
Doubtful Debts. Since the provision for bad debts is a charge against profit it
must be debited to the profit and loss account.

The amount to be charged against profits in P&L a/c is:

B+B + N – O
• First B stands for bad debts
• Second B stands for further bad debts
• N stands for new provision
• O stands for old reserve

Illustration 2:
On 1st January, 2006, the RBD account stood at Rs.9000 in the books of a
merchant. The bad debts written off during the year ended 31st December,
2006, amounted to Rs.4800 and Sundry Debtors stood at Rs.480000. It was
desired to maintain the reserve for bad debts at 5% on Debtors. During the
year 2007, bad debts written off amounted to Rs.12000 and Sundry Debtors
on 31st December 2007 amounted to Rs.380000. As usual 5% reserve was
required. Show the adjustment in the profit and loss account.
Solution:

Profit and Loss Account for the Year 2006

Bad debts 4800
+New reserve 24000
(5%of 480000)
-Old reserve (9000) 19800

Additional reserve required to be provided in P&L a/c in 2006 is Rs.19800

Profit and Loss Account for the Year 2007

Bad debts 12000
+New reserve 19000
(5%of 380000)
-Old reserve (24000) 7000

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Self Assessment Questions

4. Given: old RBD = 4000, new RBD required = 7000, then the amount of
additional reserve to be created is Rs. _____________.
a. 4000
b. 7000
c. 3000
5. Given: old RBD = 4000, additional RBD required = 7000, then the
amount of additional reserve to be created is Rs._____________.
a. 4000
b. 7000
c. 3000
6. Given: old RBD = 4000, Sundry Debtors 50000, new RBD required =
10% on Sundry Debtors, then the amount of additional reserve to be
created is Rs._____________.
a. 4000
b. 5000
c. 1000
7. Given: old RBD = 4000, Sundry Debtors 50000, further bad
debts = 1000, new RBD required = 10% on Sundry Debtors, then the
amount of additional reserve to be created is Rs._____________.
a. 4900
b. 900
c. 3900
6.3.8 Reserves for discount on debtors
It is an amount set aside for giving discount to debtors. It is created by
debiting the profit and loss account.
The following guidelines must be considered while dealing with the reserve
for discount on debtors.
Illustration 3: The following items are found in the trial balance of M/s
Sharada Enterprise on 31st December, 2000.
Sundry Debtors Rs.160000
Bad Debts written off Rs 9000
Discount allowed to Debtors Rs. 1800
Reserve for Bad and doubtful Debts 31-12-1999 Rs. 16500
Reserve for discount on Debtors 31-12-1999 Rs. 3200

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You are required to provide the bad and doubtful debts at 5% and for
discount on debtors at 2%. Show the adjustments for bad debts, bad debts
reserve, discount account, and provision for discount on debtors.
Solution:
The amount debited to P&L account towards RBD is computed as follows:
Old RBD = Rs. 16500
(-) Bad debts = Rs. 9000
Balance = Rs. 7500
New RBD @5% on160000 = Rs. 8000
RBD to be provided = Rs. 500 (8000-7500)
The amount debited to P&L account towards Reserve for Discount on
Debtors is computed as follows:
Good Debtors = Rs.160000 – Rs.8000 (New RBD)= Rs.152000
Old Reserve for
Discount on Drs = Rs.3200
Less Discount on Drs = Rs.1800
Balance Reserve = Rs.1400
New Reserve for
Discount at 2%
On good Drs 152000 = Rs.3040
Reserve for Discount to be
provided now = Rs.1640 (3040 -1400)

In the balance sheet, the Sundry debtors are reduced by bad debts shown
out side the trial balance, the new RBD, discount on debtors shown out side
the trial balance and the new Reserve for discount on debtors.
6.3.9 Reserves for discount on creditors
Discount on creditors is an amount of discount expected to be received from
creditors. It is a gain. Discount on creditors may be credited to P/L a/c only if
it is a regular practice to receive it and it is very certain that it will be
received.
6.3.10 Closing stock
Stock of goods – raw materials, semi finished goods, finished goods – at the
end of the accounting year is called closing stock. It should be credited to
the trading account. In the balance sheet, it appears as an asset.

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Self Assessment Questions

8. Given: old RBD = 4000, sundry debtors = 50000, further bad debts =
1000, new RBD required = 10% on sundry debtors, and reserve for
discount on debtors required is at 5%. The amount of reserve for
discount on debtors to be created is Rs. _____________.
a. 2205
b. 2500
c. 250

Activity 1:
Find out the missing figures.
Office stationery Consumables
Opening stock 5000 8000
Purchased during the year 25000 ?
Closing stock 3000 6000
Consumed for the year ? 24000

Answer to Activity 1:
• Office stationery consumed for the year (5000+25000-3000)=27000
• Consumables purchased during the year (24000+6000-8000) =22000

6.4 Adjusted Trial Balance

The adjustments may be directly incorporated into the final accounts as
shown above. However, the adjustments may also be incorporated into the
trial balance so that the preparation of the final accounts becomes easy.
Such a trial balance, which is prepared after incorporating all the
adjustments, is called adjusted trial balance.
Such adjustments are done through the concerned ledger accounts.
We may understand this with the help of an illustration.

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Illustration 4: From the given trial balance draft an Adjusted Trial Balance.
Trial Balance as on 31.03.2011
Debit balances Rs. Credit balances Rs.
Furniture and Fittings 10000 Bank Over Draft 16000
Buildings 500000 Capital Account 400000
Sales Returns 1000 Purchase Returns 4000
Bad Debts 2000 Sundry Creditors 30000
Sundry Debtors 25000 Commission 5000
Purchases 90000 Sales 235000
Advertising 20000
Cash 10000
Taxes and Insurance 5000
General Expenses 7000
Salaries 20000
TOTAL 690000 TOTAL 690000

Adjustments:
1. Charge depreciation at 10% on Buildings and Furniture and fittings.
2. Write off further bad debts 1000
3. Taxes and Insurance prepaid 2000
4. Outstanding salaries 5000
5. Commission received in advance1000

Solution:
Ledger accounts
Furniture and fittings a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 10000 By Depreciation 1000
By bal c/d 9000
Total 10000 Total 10000
To bal b/d 9000

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Buildings a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 500000 By Depreciation 50000
By bal c/d 450000
Total 500000 Total 500000
To bal b/d 450000

Bad Debts a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 2000
To Sundry Debtors 1000 By bal c/d 3000
Total 3000 Total 3000
To bal b/d 3000

Sundry Debtors a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 25000 By Bad Debts 1000
To bal c/d By bal c/d 24000
Total 25000 Total 25000
To bal b/d 24000

Taxes and Insurance a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 5000 By Prepaid taxes and Insurance 2000
To bal c/d By bal c/d 3000
Total 5000 Total 5000
To bal b/d 3000

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Prepaid taxes and Insurance a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
To Taxes and Insurance 2000 By bal c/d 2000
Total 2000 Total 2000
To bal b/d 2000

Salaries a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 20000 By bal c/d 25000
To Outstanding Salaries 5000
Total 25000 Total 25000
To bal b/d 25000

Outstanding Salaries a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
To bal c/d 5000 By Salaries 5000
Total 5000 Total 5000
By bal b/d 5000

Depreciation a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Furniture and fittings 1000
To Buildings 50000 By bal c/d 51000
Total 51000 Total 51000
To bal b/d 51000

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Commission a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Commission received in advance 1000 By bal b/d 5000
To bal c/d 4000
Total 5000 Total 5000
By bal b/d 4000

Commission received in advance a/c

Dr. Cr.
Particulars Rs. Particulars Rs.
By Commission 1000
To bal c/d 1000 By
Total 1000 Total 1000
To bal b/d By bal b/d 1000

Adjusted Trial Balance as on 31.03.2011

Debit balances Rs. Adjustments Adjusted amount
Furniture and Fittings 10000 -1000 9000
Buildings 500000 -50000 450000
Sales Returns 1000 1000
Bad Debts 2000 +1000 3000
Sundry Debtors 25000 -1000 24000
Purchases 90000 90000
Advertising 20000 20000
Cash 10000 10000
Taxes and Insurance 5000 -2000 3000
General Expenses 7000 7000
Salaries 20000 +5000 25000
Depreciation - 1000+50000 51000
Prepaid Taxes and Insurance - 2000 2000
TOTAL 690000 695000

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Credit balances Rs.

Bank Over Draft 16000 16000
Capital Account 400000 400000
Purchase Returns 4000 4000
Sundry Creditors 30000 30000
Commission 5000 -1000 4000
Sales 235000 235000
Outstanding salaries - 5000 5000
Commission received in
- 1000 1000
advance
TOTAL 690000 695000

Self Assessment Questions

9. Given: salaries paid during 01.4.2010 and 31.03.2011 is Rs.60000
Prepaid salaries as on 01.4.2010 is Rs. 5000
Prepaid salaries as on 01.4.2010 and 31.03.2011 is Rs.20000
The amount of salary to be debited to the P/L for the year 2010-11 is
a. Rs. 60000
b. Rs. 55000
c. Rs. 80000
d. Rs. 45000

6.5 Final Accounts of Joint Stock Companies

Section 211 requires that every balance sheet of a company should provide
a true and fair view of the state of affairs of a company at the end of the
financial year. The balance sheet should be set out in the form prescribed in
Part 1 of Schedule VI of the Companies Act 1956.

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Vertical Form of Balance Sheet

Figures as
Figures as at
at the end
Schedule the end of
of current
No. previous
financial
financial year
year
I. Sources of Funds:
(1) Shareholders funds
a) Capital
b) Reserves and Surplus
(2) Loan funds
a) Secured loans
b) Unsecured loans
TOTAL :
II. Applications of Funds:
(1) Fixed assets
a) Gross block
b) Less depreciation
c) Net block
d) Capital work-in-progress
(2) Investments
(3) Current assets, loans, and
advances:
a) Inventories
b) Sundry debtors
c) Cash and bank balances
d) Other current assets
e) Loans and advances
Less : current liabilities and
provisions:
a) Liabilities
b) Provisions
c) Current assets
(4) a) Miscellaneous expenditure to
the extent not written off or
adjusted
b) Profit and Loss account
TOTAL :

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Activity 2:
Pick out a balance sheet of a manufacturing company and list out the
various types of capital, assets, and liabilities.
Hint : Visit website of any company and download balance sheet –list out
the following-
Authorised, Issued, subscribed, called-up and paid-up capital.
Fixed assed , Current asset
Longterm and Current-liabilities

Illustration 5: From the following trial balance of Anjana Machineries

Limited and the additional information, prepare the final accounts of the
company as per Schedule VI of the Companies Act.
Trial Balance as on 31st March, 2008
Particular Amount Particular Amount
Opening stock- Raw materials 1,50,000 Sales 47,50,000
- Work-in-process 28,000 General reserve 25,000
- Finished goods 1,90,000 Provision for dep on P&M 1,40,000
Purchases 15,50,000 Sundry creditors 1,35,000
Salaries and wages 2,30,000 Provision for dep on 30,000
furniture
Plant and machinery (at cost) 12,20,000 Purchases returns 25,000
Investment at cost (short term) 3,29,000 Eq share capital (Rs.100 30,00,000
each)
Sundry debtors 1,58,000 10% Pref Sh.Cap 5,00,000
(Rs.100/each)
Cash at bank 2,50,900 9% Debentures 6,00,000
Directors remuneration 80,000 Deb Redemption Reserve 3,00,000
Interim dividend 1,20,000 Bills payable 90,000
Office furniture (at cost) 1,80,000 Securities premium 2,80,000
Rates and taxes 17,000 Income from investments 30,000
Insurance 15,000 Excise duty payable 15,000
Audit fee 30,000 Profit and loss 20,000
Sales return 70,000
Excise duty on finished goods 3,20,000

Rent 90,000

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Rent prepaid 20,000

Bad debts 18,000
Interest on debentures 27,000
Freehold premises 47,30,000
Other expenses 37,100
Bills receivable 30,000
Preliminary expenses 50,000
Total 99,40,000 Total 99,40,000

Additional information:
1. Stock as on 31st March, 2008
2. Raw materials and stores Rs.1,45,000; work-in-process, Rs.22,000;
Finished goods, Rs.1,98,000.
3. Provide depreciation on written down value basis on plant and
machinery @ 20% per annum and on furniture @ 15% per annum and
on freehold premises @ 5% per annum.
4. In the middle of the year, a machine costing Rs.3,00,000 was
purchased and duly recorded.
5. Sundry debtors include Rs.18,000 due for more than six months.
Provide for bad and doubtful debts @ 5% on debtors.
6. Market value of investments is Rs.3,19,000.
7. Make a provision for income-tax @ 35%.
8. Corporate dividend tax is 14.025% including surcharge of 10% and
education cess of 2%.
9. The Board of Directors has recommended a final dividend @ 15% on
equity shares.
10. Transfer of Rs.1,00,000 to debenture redemption reserve.
11. Transfer of minimum amount to statutory reserve as required by
company law.
12. Provision for depreciation on freehold premises as on 31/03/2007 was
Rs.12,70,000.
13. Written of one-fifth of preliminary expenses.
14. Interest on debentures becomes due on 31st October and 31st March.

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Solution:
Profit and Loss Account for the year ended 31st March, 2008
Particular Rs. Amount Particular Rs. Amount
To opening stock By sales 47,50,000
Work-in-process 28,000 (-) excise duty 3,20,000
Finished goods 1,90,000 2,18,000 (-)sales return 70,000 43,60,000
To raw material consumed
Opening stock of RM 1,50,000 By income from 30,000
Add purchases 15,50,000 invt

(-) purchase returns 25,000 By cl.stock 1,98,000

(-) closing stock of RM 1,45,000 15,30,000 Finished goods 22,000 2,20,000

Work-in-process

To Salaries and wages 2,30,000

To Director’s remun 80,000
To Rates and taxes 17,000
To Insurance 15,000
To Audit fees 30,000
To Rent 90,000
To Bad debts 18,000
To Prov for bad debt 7,900
To Interest on debenture 27,000
(+) interest due 27,000 54,000
To depreciation on
Plant and Machinery 20% 2,14,000
Office furniture 15% 22,500
Freehold premises 5% 2,36,500 4,73,000

To Other expenses 37,100

To Loss on investment 10,000
To Pre expenses written off 10,000
To Provision for income tax 6,26,500
To Net profit 11,63,500
46,10,000 46,10,000

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Profit and Loss Appropriation Account

Particular Amount Particular Amount

To interim divided 1,20,000 By Balance b/d 20,000

To Prop dividend – equity 4,50,000 By Net profit 11,63,500
- Preference 50,000 5,00,000 (transfer from
profit and loss)

To corporate dividend tax

payable ( 50, 000 x 16,830
14.025% )

To Provision for Corp Div

Tax (14.025% of 70,125
Rs.5,00,000) 1,00,000

To Debenture redemption 58,175

reserve
To General reserve (5% of
3,18,370
Rs.11,63,500)
To Balance c/d 11,83,500 11,83,500

Balance Sheet of Anjana Machineries as on 31st March, 2008

Particular Amount Particular Amount

Share capital – Fixed Assets: 60,00,000

Authorised capital Freehold premises 15,06,500 44,93,500
Issued and subscribed (-) Prov for Dep
capital P and M cost 9,20,000
(+) purchased 3,00,000
30,000 Equity shares of 30,00,000 (-) Prov for Depr
Rs.100 each fully paid up
( 1,40,000 + (3,54,000)
5000 10% Pref shares of 5,00,000 2,14,000) 8,66,000
Rs. 100 each fully paid Furniture- cost
Reserves and Surplus 1,80,000
(-) Prov for Dep
Securities premium 2,80,000 30,000 +22,500
52,500 1,27,500
Debentures Red res 3,00,000
(+) transfer from P&L a/c 1,00,000 4,00,000
Investments at
market value 3,19,000
General reserve 25,000 C.A, Loans and
(+) statutory transfer 58,175 83,175
Advances:
Profit and loss C. Assets
3,18,370 Stock
Secured Loans:
6,00,000 Raw material 1,45,000
9% Debentures 27,000 Work-in-process 22,000
Interest on debentures Finished goods 1,98,000 3,65,000

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Unsecured Loans: Debtors

Cur Lia and provisions (-) Prov for bad debts 1,58,000
current liabilities Debts due more than
Bills payable 90,000 6 months (7,900) 1,50,100
Sundry creditors 1,35,000 Other debts
Excise duty payable 15,000 Cash at bank 18,000
Corp div tax payable 16,830 Loans and Adv 1,40,000 2,50,900
Bills receivable 30,000
Provisions: 70,125 Prepaid rent 20,000 50,000
Provision for corporate 6,26,500
dividend tax 4,50,000 Misc Exps
50,000
Provision for tax 50,000 5,00,000 Pre expenses 40,000
10,000
Prop div on Eq capital (-) written off
Prop div on pref capital
66,62,000 66,62,000

6.6 Summary
Let us recapitulate the important concepts discussed in this unit:
• The final accounts has two components. They are profit and loss
account and balance sheet.
• They must be prepared on accrual basis. So adjustments must be
incorporated in the final accounts.
• Balance sheet of a joint stock company must be prepared in accordance
with Part 1 of Schedule VI of the Companies Act 1956.

6.7 Glossary
Adjusted trial balance: Trial balance redrafted after incorporating all the
adjustments.
Bad debts: An irrecoverable debt.
Depreciation: Fall in the value of a fixed asset.
Provision (Reserve) for Doubtful Debts: Reserve created for meeting
expected bad debts.
Reserve for discount on creditors: Discount expected to be allowed by
creditors.
Reserve for discount on debtors: Reserve created for allowing discount to
debtors.

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6.8 Terminal Questions

1. The following trial balance is extracted from the books of a merchant on
31-12-2004.

Furniture and Fittings 640 Bank Over Draft 2850

Motor Vehicles 6250 Sales Returns 200
Buildings 7500 Purchase Returns 125
Capital Account 12500 Advertising 450
Bad Debts 125 Interest on Bank Over Draft 118
Provision for Bad Debts 200 Commission 375
Sundry Debtors 3800 Cash 650
Sundry Creditors 2500 Taxes and Insurance 1250
Stock on 1-1-2004 3460 General Expenses 782
Purchases 5475 Salaries 3300
Sales 15450

The following adjustments are to be made.

1. Stock in hand on 31-12-2004 was Rs.3250.
2. Depreciate buildings at the rate of 5%, furniture and fittings @ 10% and
motor vehicles @ 20%.
3. Rs.85 is due for interest on bank overdraft.
4. Salaries of Rs.300 and taxes Rs.120 are outstanding.
5. Insurance amounting to Rs.100 is prepaid.
6. One-third of the commission received is with respect to the work to be
done next year.
7. Written off a further sum of Rs.100 as bad debts and provision for bad
and doubtful debts to be made equal to 10% on sundry debtors.
Prepare trading account and profit and loss account.

6.9 Answers

Self Assessment Questions

1. Outstanding expenses
2. True
3. Accrued income

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4. C
5. B
6. C
7. B
8. A
9. d

Terminal Questions
1. Gross Profit Rs.9690, Net Profit Rs.1551.

6.10 Case Study

Adjustment Entries
RD International Ltd. provides local mail delivery service in the financial
district of Bangalore. The trial balance of the company is as follows:
RD International Ltd.
Trial Balance, 28th February, 2011
Debit Credit
Account
Rs. Rs.
Office Equipment 7,000
Accumulated Depreciation, Office Equipment 1,000
Office Supplies 3,800
Debtors 1,900
Cash 770
Prepaid Rent 2,400
Creditors 1,100
Unearned Revenue 400
Share Capital 10,000
Retained Earnings 2,100
Dividends 1,400
Revenue from Services 7,200
Salaries Expense 3,800
Telephone Expense 730
Total 21,800 21,800

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Additional information:
(a) Prepaid rent represents rent from February to April.
(b) The inventory of office supplies at the end of February was Rs. 3,200.
(c) Revenue earned for services preformed but not yet billed at the end of
February was Rs.1,600.
(d) Revenue earned for service performed, paid for in advance, was
Rs.210.
(e) Depreciation on office equipment for February was Rs. 250.
(f) Accrued salaries at the end of February were Rs. 540.
1. Prepare adjusting entries and post them directly to the T accounts.
2. Prepare an adjusted trial balance.
3. Prepare the profit and loss account, statement of retained earnings, and
balance sheet.
Source: Narayanaswamy, R., Financial Accounting, A Managerial Perspective
3/e, PHI

Answer to Case study

1. Preparing and posting adjusting entries to T accounts
Office Equipment
Balance 7,000

Accumulated Depreciation, Office Equipment

Balance 1,000
[e] 250
Balance 1,250

Office Supplies
Balance 3,800 (b) 600
Balance 3,200

Debtors
Balance 1,900

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Cash
Balance 770

Prepaid Rent
Balance 2,400 (a) 800
1,600

Unbilled Revenue
(c) 1,600

Creditors
Balance 1,100

Unearned Revenue
(d). 210 Balance 400
Balance 190

Salaries Payable
(f) 540

Share Capital

Balance 10,000

Retained Earnings

Balance 2,100

Dividends

Balance 1,400

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Revenue from Services

Balance 7,200
(c) 1,600
(d) 210
Balance 9,010

Salaries Expense
Balance 3,800
(f) 540
Balance 4,340

Office Supplies Expense

(b) 600

Telephone Expense
Balance 730

Rent Expense
(a) 800

Depreciation Expense
(e) 250

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2. Preparing adjusted trial balance

RD International Ltd.
Adjusted Trial Balance, 28th February, 2011
Debit Credit
Account
Rs. Rs.
Office equipment 7000
Accumulated depreciation, office equipment 1250
Office supplies 3200
Debtors 1900
Cash 770
Prepaid rent 1600
Unbilled revenue 1600
Creditors 1100
Unearned revenue 190
Salaries payable 540
Share capital 10000
Retained earnings 2100
Dividends 1400
Revenue from services 9010
Salaries expense 4340
Office supplies expense 600
Telephone expense 730
Rent expense 800
Depreciation expense 250
Total 24190 24190

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Preparing Financial Statements

RD International Ltd.
Profit and Loss for the month ended 28th February, 2011
Particulars Rs. Rs.
Revenues 9010
Revenue from services
Expenses
Salaries expense 4340
Office supplies expense 600
Telephone expense 730
Rent expense 800
Depreciation 250 6720
Net Profit 2290

RD International Ltd.
Statement of Retained Earnings for the
month ended 28th February, 2011
Revenues Rs. Rs.
Opening balance 1st February, 2011 2100
+ Net Profit 2290
Profits available for distribution 4340
Less: Dividends 1400
Retained Earnings February 28, 2011

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RD International Ltd
Balance Sheet as on 28th February, 2011
Particulars Rs. Rs.

Assets
Office equipment 7000
Less: Accumulated depreciation 1250 5750
Office Supplies 3200
Debtors 1900
Cash 770
Prepaid rent 1600
Unbilled revenue 1600

Total Assets 14820

Liabilities
Creditors
Unearned revenue
Salaries payable

Total Liabilities 1830

Share capital 10000

Retained earnings 2990

Equity 12990

Total liabilities+ Equity 14820

References:
• Narayanaswamy R., Financial Accounting, A Managerial Perspective
3/e, PHI
• Jain S. P., & Narang K. L., Financial Accounting, Kalyani Publishers

E-Reference:
• www.phindia.com/narayanaswamy – retrieved on December-23rd 2012

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