Chapter # 2

Accounting for Company –

Final Accounts

Sameer Hussain

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Accounting for Company – Final Accounts
Chapter # 2

SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

 Accounting for companies.
 Financial Statements in accordance with International Accounting Standards.

WHAT THE EXAMINER USUALLY ASK?

 Income Statement.
 Statement of Retained Earnings.
 Balance Sheet.

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 Accounting for Company – Final Accounts
Chapter # 2

FINANCIAL STATEMENTS
Financial statement is a written report which quantitatively describes the financial health of a
company. Financial statements are usually compiled on a quarterly and annually basis. Financial
statements include:
 Income Statement.
 Balance Sheet.
 Cash Flow Statement.
 Statement of Changes in Equity.
 Notes to the Financial Statements.

INCOME STATEMENT
Income statement shows the financial performance of the business. It shows the result of
operations for a period. It consists of revenue and expenses. When total revenues exceed the
total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting
amount is net loss.

Name of Company
Income Statement
For the Period Ended______
Sales XXX
Less: Sales discount XXX
Less: Sales returns and allowances XXX (XXX)
Net sales XXX
Less: Cost of Goods Sold:
Merchandise inventory (beg) XXX
Add: Net Purchases:
Purchases XXX
Add: Transportation in XXX
Delivered purchases XXX
Less: Purchase discount (XXX)
Less: Purchase returns & allowances (XXX)
Net purchases XXX
Merchandise available for sale XXX
Less: Merchandise inventory (end) (XXX)
Cost of goods sold (XXX)
Gross profit XXX
Less: Operating Expenses:
Office salaries expense XXX
Advertising expenses XXX
Directors’ fee expenses XXX
Auditor’s fee expenses XXX
Insurance expense XXX
Bad debts expense XXX
Depreciation expense XXX
Total operating expenses (XXX)
Profit/loss from operation XXX/(XXX)
Add: Other Income:
Commission income XXX
Income before income tax XXX
Less: Income tax expense (XXX)
Net profit/Loss XXX/(XXX)

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Accounting for Company – Final Accounts
Chapter # 2

BALANCE SHEET
Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and
owner’s equity on a given date. It is a quantitative summary of company’s financial condition at
a specific point in time, including assets, liabilities and net worth. The first part of balance sheet
shows all the productive assets a company owns, and the second part shows all the financing
methods (such as liabilities and owner’s equity).

Name of Company
Balance Sheet
As on _________
Equities Assets
Shareholder’s Equity: Fixed Assets:
Authorized Capital: Goodwill XXX
XXX ordinary shares Plant & equipment XXX
@ Rs.xx each XXX Less: All for depreciation (XXX) XXX
Preliminary expenses XXX
Issued & Paid-up Capital: Total fixed assets XXX
XXX ordinary shares
@ Rs.xx each XXX Current Assets:
Add: Shares premium XXX Office supplies XXX
Less: Shares discount (XXX) Prepaid XXX
XXX Merchandise inventory XXX
Add: Retained earnings XXX Accounts receivable XXX
Add: Reserves XXX Cash/Bank XXX
Total shareholder’s equity XXX Total current assets XXX

Liabilities:
Long-Term Liabilities:
Debentures payable XXX
Premium on redemption XXX
Total long-term liabilities XXX

Current Liabilities:
Accounts payable XXX
Cash dividend payable XXX
Stock dividend payable XXX
Accrued expenses XXX
Unearned income XXX
Total current liabilities XXX
Total equities XXX Total assets XXX

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 Accounting for Company – Final Accounts
Chapter # 2

STATEMENT OF RETAINED EARNINGS

Name of Company
Statement of Retained Earnings
For the Period Ended ______
Retained earnings (opening balance) XXX
Add: Net income for the period XXX
Total retained earning XXX
Less: Reserves & Dividends:
Reserves XXX
Cash dividend XXX
Stock dividend XXX
Total reserves and dividends (XXX)
XXX
Less: Dividends:
Cash dividend XXX
Stock dividend XXX
Total dividends (XXX)
Retained earnings (ending balance) XXX

ILLUSTRATION # 1: (FINANCIAL STATEMENTS)

The pre-closing trial balance of XYZ Ltd. was prepared on 31 March 2009 showed as follows:-
Debit Balances (in Rs.) Credit Balances (in Rs.)
Cash 76,000 Accounts payable 167,000
Accounts receivable 50,000 All. for depreciation – Equipment 18,000
Merchandise inventory 51,000 Allowance for bad debts 3,000
Purchases 200,000 Paid-up capital 220,000
Equipment 312,000 Sales 300,000
Insurance expense 2,000 Retained earnings 18,000
Salary expense 11,000
Director’s fee 17,000
Auditor’s fee 7,000
726,000 726,000
Supplementary data for adjustment on June 30, 1993:-
(a) Depreciation expense on equipment is estimated for the year at Rs.5,000.
(b) The allowance for bad debts is to be increased by Rs.1,000.
(c) Appropriate Rs.20,000 for contingencies.
(d) Merchandise inventory valued on 31 March 2009 was Rs.40,000.
REQUIRED
(a) Prepare Income Statement for the year ended 31 March 2009 and also Statement of
Retained Earnings.
(b) Prepare Balance Sheet as of 31 March 2009.

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Accounting for Company – Final Accounts
Chapter # 2

SOLUTION # 1:
XYZ Ltd.
Income Statement
For the Period Ended 31 March 2009
Sales 300,000
Less: Cost of Goods Sold:
Merchandise inventory (beginning) 51,000
Add: Purchases 200,000
Merchandise available for sale 251,000
Less: Merchandise inventory (ending) (40,000)
Cost of goods sold (211,000)
Gross profit 89,000
Less: Operating Expenses:
Insurance expense 2,000
Salary expense 11,000
Directors’ fee expenses 17,000
Auditor’s fee expenses 7,000
Bad debts expense 1,000
Depreciation expense 5,000
Total operating expenses (43,000)
Net profit 46,000

XYZ Ltd.
Statement of Retained Earnings
For the Period Ended 31 March 2009
Retained earnings (opening balance) 18,000
Add: Net income for the period 46,000
Total retained earning 64,000
Less: Reserves:
Reserve for contingencies (20,000)
Retained earnings (ending balance) 44,000

XYZ Ltd.
Balance Sheet
As on 31 March 2009
Equities Assets
Shareholder’s Equity: Fixed Assets:
Issued & Paid-up Capital: Equipment 312,000
22,000 ordinary shares Less: Allowance for depreciation (23,000)
@ Rs.10 each 220,000 Total fixed assets 289,000
Add: Retained earnings 44,000
Add: Reserve for contingencies 20,000 Current Assets:
Total shareholder’s equity 284,000 Merchandise inventory 40,000
Accounts rec. 50,000
Liabilities: Less: All for b/d(4,000) 46,000
Accounts payable 167,000 Cash 76,000
Total liabilities 167,000 Total current assets 162,000
Total equities 451,000 Total assets 451,000

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 Accounting for Company – Final Accounts
Chapter # 2

PRACTICE QUESTIONS
Question # 1: 2002 – Regular & Private (Advanced & Cost Accounting)–UOK
Pak. Company Ltd. was registered with an authorized capital of Rs.5,000,000 divided into
500,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on
June 30, 2002:
Title of Accounts Debit Credit
Cash in bank 63,000
Accounts receivable 100,000
Allowance for bad debts 3,000
Office supplies 12,000
Merchandise inventory 1.7.01 150,000
Prepaid insurance 8,000
Machinery – cost 1,200,000
Allowance for depreciation – Machinery 120,000
Preliminary expenses 6,000
Accounts payable 30,000
10% Bonds payable 200,000
Paid up capital 800,000
Retained earnings 210,000
Sales revenue 700,000
Interest revenue 7,000
Sales return & allowance 20,000
Purchases 400,000
Transportation – in 40,000
Purchases returns & allowances 30,000
Salaries expenses 50,000
Rent expenses 36,000
Income tax expenses 10,000
Advertising expenses 5,000
2,100,000 2,100,000
Data for Adjustments on June 30, 2002:
(a) Rent expenses for the year amounted to Rs.30,000.
(b) Merchandise inventory was valued on June 30, 2002 at Rs.160,000.
(c) Provide allowances for depreciation on machinery for the year Rs.80,000.
(d) Allowance for bad debts Rs.5,000 for the year.
(e) Appropriate Rs.50,000 for plant extension and Rs.40,000 for contingencies.
(f) Declared cash dividend @ 10% on capital.
REQUIRED
(a) Prepare a classified income statement for the year ended June 30, 2002 and also a
statement of retained earnings.
(b) Prepare a balance sheet as of June 30, 2002 in classified form.

Question # 2: 2003 – Regular & Private (Advanced & Cost Accounting)–UOK

Mehran Company was registered with an authorized capital of Rs.6,000,000 divided into
600,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on
December 31, 2002, the end of the accounting year before the closing process:
Debit Balance:
Cash Rs.40,000; Accounts receivable Rs.65,000; Merchandise inventory (1.1.2002) Rs.25,000;
Machinery – cost Rs.1,500,000; Purchase Rs.480,000; Transportation in Rs.20,000; Salaries
expense Rs.58,000; Unexpired insurance Rs.8,000; Rent expense Rs.48,000; Auditor’s fee
expense Rs.20,000; Director’s fee expense Rs.18,000 (total Rs.2,282,000).

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Accounting for Company – Final Accounts
Chapter # 2
Credit Balance:
Accounts payable Rs.45,000; Accumulated depreciation – Machinery Rs.140,000; Allowance for
bad debts Rs.8,000; 10% Bonds payable Rs.280,000; Paid up capital Rs.1,000,000; Sales revenue
Rs.750,000; Retained earnings Rs.59,000 (total Rs.2,282,000).
Data for Adjustments on December 31, 2002:
(a) Merchandise inventory at Dec. 31, 2002 was valued at Rs.180,000.
(b) Allowance for bad debts to be increased by Rs.2,000.
(c) Insurance expired Rs.3,000.
(d) Machinery is depreciated by 20% Diminishing Balance Method.
(e) Salaries prepaid Rs.8,000.
(f) Rent payable Rs.12,000.
(g) Provide Rs.20,000 for income tax.
(h) Appropriate Rs.10,000 for contingencies.
REQUIRED
(a) Prepare Income Statement for the year ended December 31, 2002 and statement of
retained earnings on the same date.
(b) Prepare balance sheet as of Dec. 31, 2002 in classified form.

Question # 3: 2004 – Regular (Advanced & Cost Accounting)–UOK

Prooj Ltd. was registered with an authorized capital of Rs.3,500,000 divided into Rs.10 shares.
The company’s books showed the following balances as on 30th June 2004.
Debit Balance: (in Rs.)
Plant assets: 3,750,000; Cash: 100,000; Accounts receivable: 162,500; Merchandise inventory
(1st July, 2003): 62,500; Sales return: 7,000; Purchases: 1,245,000; Transportation in: 20,000;
Salaries expenses: 145,000; Prepaid advertising: 20,000; Director’s fee: 215,000
(Total Rs.5,727,000).
Credit Balance: (in Rs.)
Sales revenue: 1,875,000; Commission income: 20,000; Accumulated depreciation: 350,000;
Retained earnings: 367,500; Paid up capital: 2,500,000; 10% debentures payable: 500,000;
Accounts payable: 112,500; Purchases return: 2,000 (Total Rs.5,727,000).
Data for Adjustment on 30th June, 2004:
(a) Merchandise inventory valued Rs.45,000.
(b) Advertising expired Rs.15,000.
(c) Director’s fee commission payable Rs.30,000.
(d) Prepaid salaries Rs.25,000.
(e) Provide depreciation on plant assets at 5%.
(f) Commission earned but not received Rs.5,000.
(g) The board of directors resolved:
1. To declare cash dividend 5% on paid up capital.
2. To appropriate for plant expansion Rs.62,500 and for contingency Rs.50,000.
REQUIRED
(a) Income statement. (b) Statement of retained earnings
(c) Balance sheet in classified form.

Question # 4: 2005 – Private (Advanced & Cost Accounting)–UOK

Hammad Hamid Ltd. was registered with an authorized capital of Rs.7,000,000 divided into
700,000 ordinary shares of Rs.10 each. The company books showed the following balances on
June 30, 2005.
Debit Balance Credit Balance
Cash 110,000 Paid up capital 500,000
Accounts receivable 125,000 Retained earnings 50,000
Merchandise inventory 42,000 Accounts payable 50,000
Office supplies 38,000 6% Debentures payable 100,000

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 Accounting for Company – Final Accounts
Chapter # 2
Unexpired insurance 40,000 Accumulated dep. (Plant assets) 50,000
Plant assets 450,000 Accumulated dep. (Vehicles) 75,000
Vehicles 200,000 Purchases return & allowance 30,000
Purchases 205,000 Commission income 90,000
Transportation in 35,000 Sales revenue 400,000
Sales return & allowance 25,000
Salaries expenses 75,000
1,345,000 1,345,000
Data for Adjustment on June 30, 2005:
(a) Office supplies used Rs.24,000.
(b) Insurance expired Rs.33,000.
(c) 20% Depreciation for the year on written down value on vehicles.
(d) Depreciation estimated on plant assets Rs.50,000.
(e) Salaries for the period Rs.80,000.
(f) Prepaid salaries Rs.5,000.
(g) Merchandise inventory Rs.32,000 on 30.6.2005.
(h) Provision for estimated bad debts Rs.5,000.
(i) Appropriate Rs.40,000 for plant extension and Rs.25,000 for general reserves and
declare cash dividend @ 10% on paid up capital.
REQUIRED
(a) Income statement. (b) Statement of retained earnings
(c) Balance sheet.

Question # 5: 2005 – Regular (Advanced & Cost Accounting)–UOK

Good Luck Ltd. has an issued capital of Rs.5,000,000 divided into ordinary shares of Rs.10 each.
The authorized capital is 1,000,000 ordinary shares of Rs.10 each. Following is the company’s
trial balance as on December 31, 2004:
Sales --- 1,000,000
Purchases 400,000 ---
Debenture interest 2,500 ---
Director’s remuneration 45,000 ---
Selling and distribution expenses 130,000 ---
General expenses 143,000 ---
Ordinary share capital --- 5,000,000
Share premium --- 50,000
5% Debentures --- 50,000
Plant & machinery cost 4,700,000 ---
Motor van at cost 700,000 ---
Accumulated dep. Plant & machine --- 140,000
Accumulated dep. Motor van --- 80,000
General reserve --- 90,000
Retained earnings Jan. 1, 04 --- 120,000
Accounts payable --- 60,000
Accounts receivable 190,000 ---
Bank balance 204,500 ---
Inventory January 1, 2004 50,000 ---
Interim dividend 25,000 ---
6,590,000 6,590,000
Additional Information – December 31, 2004:
(a) Merchandise inventory valued at Rs.80,000.
(b) Dividend proposed on ordinary shares at 3%.
(c) Audit fees for the year estimated at Rs.5,000.

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Accounting for Company – Final Accounts
Chapter # 2
(d) Provision for depreciation on plant and machinery and motor van is estimated at 10%
and 20% per annum respectively.
(e) The directors have recommended to transfer Rs.50,000 to general reserve.
REQUIRED
(a) Income statement for the year ended December 31, 2004.
(b) Statement of retained earnings.
(c) Balance sheet as on December 31, 2004 in a classified form.

Question # 6: 2008 – Private (Advanced & Cost Accounting)–UOK

Star Co. Ltd. was registered with capital of Rs.800,000 divided into shares of Rs.10 each. The
following are the account balances of the company as on June 30, 2007:
Debit Balances:
Cash Rs.11,000, Allowance for bad debts Rs.1,000, Marketable securities Rs.6,000, Accounts
receivable Rs.22,000, Merchandise inventory Rs.10,000, Machine cost Rs.55,000, Purchases
Rs.325,000, Sales returns & allowances Rs.30,000, Office salaries expense Rs.13,000, Sales
salaries expense Rs.15,000, Advertising expense Rs.8,000, Office rent expense Rs.24,000,
Auditors fees Rs.5,000, Directors fee Rs.14,000, Discount shares Rs.10,000.
Credit Balances:
Accounts payable Rs.6,000, Debentures payable Rs.5,000, Shares capital Rs.110,000, Sales
Rs.400,000, Retained earnings ?
Data for Adjustment on June 30, 2007:
1) Merchandise inventory valued at Rs.58,000.
2) Estimated allowance for bad debts Rs.1,300.
3) Depreciation expense for the year Rs.9,000.
4) Prepaid rent Rs.4,000.
5) Declared cash dividend Rs.4,000 & stock dividend Rs.1,000.
REQUIRED
Prepare:
(a) As Income Statement for the year ended June 30, 2007.
(b) Statement of Retained Earnings.
(c) A Balance Sheet as of June 30, 2007 in a classified form.

Question # 7: 2004 – Private (Advanced & Cost Accounting)–UOK

Sana Ltd. was registered with a capital 500,000 shares of Rs.10/= per. The unarranged trial
balance at 31st December 2004 was as under:
Account Titles Debit Credit
Cash 120,000
Accounts receivable 155,000
Accounts payable 145,000
Merchandise inventory 125,000
Purchases 1,500,000
Paid up capital 1,800,000
Transportation in 20,000
Salaries expenses 120,000
Sales 1,830,000
Building 1,800,000
Auditors fee 70,000
Furniture 50,000
Retained earnings 225,000
Fire insurance premium 10,000
Utility expenses 30,000
4,000,000 4,000,000

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 Accounting for Company – Final Accounts
Chapter # 2
Data for Adjustment on 31-12-04
1. Merchandise inventory valued at Rs.140,000.
2. Salaries unpaid amounted to Rs.10,000.
3. Accrued utility expenses Rs.5,000.
4. One-fifth of insurance premium is unexpired.
5. Provide depreciation on furniture 20% and on building at 2%.
6. As per board of directors approval:
(a) Reserve for income tax @ 10% of net income.
(b) Reserve for contingencies Rs.80,000.
(c) Interim dividend declared @ 10% of paid up capital.
REQUIRED
(a) Income statement. (b) Statement of retained earnings
(c) Balance sheet in classified form.

Question # 8: 2006 – Private (Advanced & Cost Accounting)–UOK

The following is the trial balance of Multi Tech Limited as at December 31, 2006:
Paid up share capital 1,000,000
Share premium 500,000
Nat income January 1, 2006 700,000
10% Debentures payable 2010 600,000
Plant and assets 3,900,000
Accumulated depreciation 460,000
Merchandise inventory 880,000
Accounts receivable 420,000
Accounts payable 360,000
Purchases and sales 3,650,000 6,540,000
Administrative salaries 500,000
Sales salaries 70,000
Director’s remuneration 160,000
Advertising expenses 280,000
Carriage outwards 100,000
Utility expenses 300,000
Bank overdraft 100,000
10,260,000 10,260,000
Additional Information:
The paid-up share capital consists of 100,000 shares of Rs.10 each.
Merchandise inventory at December 31, 2006 was Rs.500,000.
Estimated tax on profit of the company for the year is Rs.150,000. The directors have proposed
final dividend of 10 percent on the ordinary share capital.
Depreciation is provided at 10 percent per annum on plant and assets. Allowance for bad debts
is to be maintained at 5 percent of the accounts receivable.
REQUIRED
(a) Income statement for the year ended Dec. 31, 2006.
(b) Statement of retained earnings.
(c) Balance sheet as at December 31, 2006.

Question # 9: 2011 – Regular (Advanced & Cost Accounting)–UOK

X, Y Company Ltd. was registered with an authorized capital of Rs.8,000,000 divided into
800,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on
June 30, 2011:
Title of Accounts Debit Credit
Cash in bank 94,500
Accounts receivable 150,000

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Accounting for Company – Final Accounts
Chapter # 2
Title of Accounts Debit Credit
Allowance for bad debts 4,500
Office supplies 18,000
Merchandise inventory 1.7.10 225,000
Prepaid insurance 12,000
Machinery – cost 1,500,000
Allowance for depreciation – Machinery 150,000
Preliminary expenses 10,000
Accounts payable 40,000
10% Bonds payable 200,000
Paid up capital 800,000
Retained earnings 310,000
Sales revenue 800,000
Commission on income 706,000
Sales return & allowance 20,000
Purchases 900,000
Transportation – in 40,000
Purchases returns & allowances 40,000
Salaries expenses 40,000
Rent expenses 26,000
Income tax expenses 10,000
Advertising expenses 5,000
3,050,500 3,050,500
Data for Adjustments on June 30, 2011:
(g) Rent expenses for the year amounted to Rs.30,000.
(h) Merchandise inventory was valued on June 30, 2011 at Rs.260,000.
(i) Provide allowances for depreciation on machinery for the year Rs.135,000.
(j) Allowance for bad debts Rs.5,000 for the year.
(k) Appropriate Rs.50,000 for plant extension and Rs.40,000 for contingencies.
(l) Declared cash dividend @ 10% on capital.
REQUIRED
(c) Prepare a classified income statement for the year ended June 30, 2011 and also a
statement of retained earnings.
(d) Prepare a balance sheet as of June 30, 2011 in classified form.

Question # 10: 2007 – Regular (Advanced & Cost Accounting)–UOK

DECENT COMPANY LIMITED
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2007
Net sales Rs._______?
Cost of goods sold Rs._______?
Gross profit (30% of net sales) Rs._______?
Operating expenses Rs._______?
Operating income (10% of net sales) Rs._______?
Interest expense Rs.20,000
Income before income tax Rs._______?
Income tax – 25% of income before income tax Rs.25,000
Net income Rs.75,000
REQUIRED
Complete the income statement using only the information available.

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