Question 1

Why is it necessary to record the adjusting entries in the preparation of final accounts?

Accepted Answer

Adjusting entries are necessary to ensure that all incomes and expenses are recorded in the correct accounting period. They help in matching revenues with expenses and provide a true and fair view of the financial position and performance of the business. Without adjusting entries, the final accounts would be incomplete and inaccurate. — Adjusting entries update the ledger accounts for accrued and deferred items, such as accrued expenses, prepaid expenses, depreciation, and outstanding incomes. This ensures that the income statement and balance sheet reflect the correct financial status as per the accrual basis of accounting.

Question 2

What is meant by closing stock? Show its treatment in final accounts?

Accepted Answer

Closing stock refers to the value of goods that remain unsold at the end of the accounting period. In final accounts, closing stock is shown on the asset side of the balance sheet and is also adjusted in the trading account to calculate the gross profit. It is added to the debit side of the trading account as it represents goods available for sale but not sold. — Closing stock is taken as an asset because it will generate future economic benefits. In the trading account, it is deducted from the cost of goods sold to arrive at gross profit. In the balance sheet, it appears under current assets.

Question 3

State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income

Accepted Answer

(a) Outstanding expenses are expenses that have been incurred but not yet paid by the end of the accounting period.
(b) Prepaid expenses are expenses paid in advance before they are incurred.
(c) Income received in advance is income received before it is earned.
(d) Accrued income is income earned but not yet received by the end of the accounting period. — These terms represent adjustments needed to match income and expenses to the correct accounting period. Outstanding expenses increase liabilities, prepaid expenses are assets, income received in advance is a liability, and accrued income is an asset.

Question 4

Give the Performa of income statement and balance in vertical form.

Accepted Answer

The income statement (Profit and Loss Account) in vertical form lists revenues at the top, followed by expenses, and shows net profit or loss at the bottom. The balance sheet in vertical form lists assets first and then liabilities below them, showing the financial position of the business.

Income Statement (Vertical Form):
Sales
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Net Profit

Balance Sheet (Vertical Form):
Assets
- Current Assets
- Fixed Assets
Total Assets

Liabilities
- Current Liabilities
- Long-term Liabilities
Capital
Total Liabilities and Capital — Vertical format presents the financial statements in a single column, making it easier to read and understand the financial position and performance.

Question 5

Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

Accepted Answer

Provision for doubtful debts is created to anticipate and provide for debts that may not be collected in the future. It ensures that the accounts reflect a realistic value of receivables and that the profit is not overstated. This provision is an expense and reduces the value of debtors in the balance sheet. — By creating this provision, businesses follow the prudence concept of accounting, which requires recognizing probable losses but not probable gains. It helps in presenting a true and fair view of financial statements.

Question 6

What adjusting entries would you record for the following:
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager's commission

Accepted Answer

(a) Depreciation:
Debit Depreciation Expense Account and Credit Asset Account.

(b) Discount on debtors:
Debit Discount Allowed Account and Credit Provision for Discount on Debtors Account.

(c) Interest on capital:
Debit Interest on Capital Account and Credit Capital Account.

(d) Manager's commission:
Debit Manager's Commission Account and Credit Manager's Account or Commission Payable Account. — Adjusting entries are made to allocate expenses and incomes to the correct accounting period and to update ledger balances before preparing final accounts.

Question 7

What is meant by provision for discount on debtors?

Accepted Answer

Provision for discount on debtors is an estimated amount set aside to cover the discount that may be allowed to debtors on the amount receivable. It is created to anticipate the discount and to present debtors at their net realizable value in the balance sheet. — This provision reduces the value of debtors and is shown as a deduction from debtors in the balance sheet. It follows the prudence concept by recognizing probable expenses.

Question 8

Give the journal entries for the following adjustments:
(a) Outstanding salary ₹ 3,500.
(b) Rent unpaid for one month at ₹ 6,000 per annum.
(c) Insurance prepaid for a quarter at ₹ 16,000 per annum.
(d) Purchase of furniture costing ₹ 7,000 entered in the purchases book.

Accepted Answer

(a) Outstanding salary ₹ 3,500:
Salary Expense A/c Dr. 3,500
To Outstanding Salary A/c 3,500
(Being salary outstanding recorded)

(b) Rent unpaid for one month at ₹ 6,000 per annum:
Rent Expense A/c Dr. 500
To Outstanding Rent A/c 500
(Being rent outstanding for one month recorded)

Calculation: ₹6,000/12 = ₹500 per month

(c) Insurance prepaid for a quarter at ₹ 16,000 per annum:
Prepaid Insurance A/c Dr. 4,000
To Insurance Expense A/c 4,000
(Being insurance prepaid for 3 months recorded)

Calculation: ₹16,000/12 × 3 = ₹4,000

(d) Purchase of furniture costing ₹ 7,000 entered in the purchases book:
Furniture A/c Dr. 7,000
To Purchases A/c 7,000
(Being furniture purchase wrongly recorded in purchases corrected) — These journal entries adjust the accounts to reflect the correct expenses and assets/liabilities before preparing final accounts.

Question 9

What are adjusting entries? Why are they necessary for preparing final accounts?

Accepted Answer

Adjusting entries are journal entries made at the end of an accounting period to update the accounts before preparing final accounts. They are necessary to record incomes and expenses in the period to which they relate, following the accrual basis of accounting.

They ensure that:
- Revenues are recognized when earned.
- Expenses are recognized when incurred.
- Assets and liabilities are properly stated.

Without adjusting entries, the financial statements would be inaccurate and misleading. — Adjusting entries include entries for accrued expenses, accrued incomes, prepaid expenses, depreciation, provisions, and corrections. They help in matching income and expenses to the correct accounting period, thus providing a true and fair view of the financial position and performance.

Question 10

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?

Accepted Answer

Provision for doubtful debts is an estimated amount set aside to cover debts that are likely to become bad or uncollectible. It is created to present debtors at their net realizable value.

Preparation of accounts:
- Provision for Doubtful Debts Account is a contra asset account deducted from Debtors in the balance sheet.
- Bad Debts Account records debts written off.

Journal entries:
1. To write off bad debts:
Bad Debts A/c Dr.
To Debtors A/c

2. To create or adjust provision:
Provision for Doubtful Debts A/c Dr. (if reducing provision)
Or
Bad Debts Expense A/c Dr. (if increasing provision)
To Provision for Doubtful Debts A/c

Calculation:
Provision is usually calculated as a percentage of debtors based on past experience or industry norms.

Example: If debtors are ₹1,00,000 and provision is 5%, provision = ₹5,000. — Provision for doubtful debts follows the prudence concept by anticipating probable losses. It ensures that assets are not overstated and profit is not inflated.

Question 11

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?

Accepted Answer

(a) When given inside the trial balance:
- Prepaid expenses appear as a debit balance and are shown on the asset side of the balance sheet.
- Depreciation is shown as an expense in the income statement and deducted from the asset value in the balance sheet.
- Closing stock is shown on the asset side of the balance sheet and adjusted in the trading account.

(b) When given outside the trial balance:
- Prepaid expenses are recorded by debiting prepaid expenses account and crediting the expense account.
- Depreciation is recorded by debiting depreciation expense and crediting the asset account.
- Closing stock is recorded by crediting closing stock account and debiting trading account.

In both cases, these adjustments ensure accurate representation of expenses and assets in final accounts. — Adjustments inside the trial balance mean the balances already include these items, so they are directly shown in final accounts. When outside, journal entries are required to incorporate these adjustments.

Question 12

Prepare a trading and profit and loss account for the year ending March 31, 2017. from the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year.

Adjustments:
1. Commission received in advance ₹1,000.
2. Rent receivable ₹ 2,000.
3. Salary outstanding ₹ 1,000 and insurance prepaid ₹ 800.
4. Further bad debts ₹ 1,000 and provision for doubtful debts @ 5% on debtors and discount on debtors @ 2%.
5. Closing stock ₹ 32,000.
6. Depreciation on building @ 6% p.a.

Accepted Answer

Solution:

Step 1: Prepare Trading Account for the year ending March 31, 2017

Trading Account

Dr. Side:
- Opening Stock: ₹50,000
- Purchases: ₹1,75,000
- Less: Purchase Return: ₹2,000
- Add: Wages: ₹3,000
- Add: Carriage Inwards (if any, not given here)

Cr. Side:
- Sales: ₹1,80,000
- Less: Sales Return: ₹3,000
- Closing Stock: ₹32,000

Calculate Gross Profit or Loss = Sales - Cost of Goods Sold

Step 2: Prepare Profit and Loss Account

Include all expenses and incomes:
- Salary (adjust for outstanding ₹1,000)
- Insurance (adjust for prepaid ₹800)
- Rent (add rent receivable ₹2,000)
- Discount allowed and received (adjust commission received in advance ₹1,000)
- Bad debts (add further bad debts ₹1,000)
- Provision for doubtful debts @5% on debtors (after bad debts)
- Discount on debtors @2%
- Depreciation on building @6%

Step 3: Prepare Balance Sheet as on March 31, 2017

Assets:
- Closing Stock ₹32,000
- Sundry Debtors (adjusted for bad debts and provision)
- Bills Receivable
- Building (less depreciation)
- Fixtures and Fittings
- Cash/Bank (if any)

Liabilities:
- Capital
- Drawings
- Bills Payable
- Loan
- Outstanding Salary
- Commission Received in Advance

Final figures:
Gross loss ₹17,000; Net loss ₹43,189; Total balance sheet ₹2,83,611

(Detailed ledger postings and calculations are required for exact figures.) — Step-by-step solution:
1. Calculate net purchases = Purchases - Purchase return
2. Calculate net sales = Sales - Sales return
3. Calculate gross profit or loss = Net sales + Closing stock - (Opening stock + Net purchases + Direct expenses)
4. Adjust indirect expenses and incomes in Profit & Loss Account
5. Calculate net profit or loss
6. Prepare Balance Sheet with adjusted assets and liabilities

All adjustments such as outstanding expenses, prepaid expenses, provisions, depreciation, and closing stock are incorporated accordingly.

Question 13

Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending March 31, 2017. from the following figures taken from his trial balance:

Adjustments:
1. Depreciation charged on machinery @ 5% p.a.
2. Further bad debts ₹1,500, discount on debtors @ 5% and make a provision on debtors @ 6%.
3. Wages prepaid ₹1,000.
4. Interest on investment @ 5% p.a.
5. Closing stock 10,000.

Accepted Answer

Solution:

Step 1: Calculate net purchases = Purchases - Purchase return
Step 2: Calculate net sales = Sales - Return inwards
Step 3: Prepare Trading Account:
- Opening stock + Net purchases + Direct expenses (wages, packing, transport) - Closing stock = Cost of goods sold
- Gross Profit = Net sales - Cost of goods sold

Step 4: Prepare Profit and Loss Account:
- Include indirect expenses (salary, rent, rates, general expense, insurance, lighting and heating, discount allowed, bad debts)
- Adjust wages prepaid ₹1,000
- Add interest received and interest on investment
- Deduct depreciation on machinery @5%
- Adjust further bad debts ₹1,500
- Make provision on debtors @6%
- Deduct discount on debtors @5%

Step 5: Calculate Net Profit

Step 6: Prepare Balance Sheet with adjusted figures

Final answers:
Gross Profit ₹79,000; Net Profit ₹52,565; Total Balance Sheet ₹1,57,565 — Step-by-step:
1. Adjust trial balance figures for returns and prepaid expenses
2. Calculate depreciation and provisions
3. Prepare Trading Account to find Gross Profit
4. Prepare Profit & Loss Account to find Net Profit
5. Prepare Balance Sheet with adjusted assets and liabilities

All adjustments are incorporated as per instructions.

Question 14

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, 2017.

Adjustments:
1. Further bad debts ₹ 1,000. Discount on debtors ₹ 500 and make a provision on debtors @ 5%.
2. Interest received on investment @ 5%.
3. Wages and interest outstanding ₹ 100 and ₹ 200 respectively.
4. Depreciation charged on motor car @ 5% p.a.
5. Closing Stock ₹ 32,500.

Accepted Answer

Solution:

Step 1: Calculate net purchases = Purchases - Return outwards
Step 2: Calculate net sales = Sales - Return inwards
Step 3: Prepare Trading Account:
- Opening stock + Net purchases + Carriage inwards + Wages + Direct expenses - Closing stock = Cost of goods sold
- Gross Profit = Net sales - Cost of goods sold

Step 4: Prepare Profit and Loss Account:
- Include indirect expenses (printing, stationery, discount, bad debts, insurance, postage, commission, repair, lighting, telephone, carriage outward)
- Adjust further bad debts ₹1,000
- Discount on debtors ₹500
- Provision on debtors @5%
- Interest received on investment @5%
- Adjust outstanding wages ₹100 and interest ₹200
- Depreciate motor car @5%

Step 5: Calculate Net Profit

Step 6: Prepare Balance Sheet with adjusted figures

Final answers:
Gross profit ₹78,000; Net profit ₹66,010; Total balance sheet ₹2,97,350 — Step-by-step:
1. Adjust trial balance figures for returns, outstanding expenses, and provisions
2. Calculate depreciation
3. Prepare Trading Account to find Gross Profit
4. Prepare Profit & Loss Account to find Net Profit
5. Prepare Balance Sheet with adjusted assets and liabilities

All adjustments are incorporated as per instructions.

Question 15

From the following Trial Balance you are required to prepare trading and profit and loss account for the year ending March 31, 2017 and Balance Sheet on that date.

Adjustments:
1. Closing stock valued at ₹ 36,000.
2. Private purchases amounting to ₹ 5000 debited to purchases account.
3. Provision for doubtful debts @ 5% on debtors.
4. Sign board costing ₹ 4,000 includes in advertising.
5. Depreciate furniture by 10%.

Accepted Answer

Solution:

Step 1: Adjust purchases by deducting private purchases ₹5,000
Step 2: Calculate net purchases = Purchases - Purchase return - Private purchases
Step 3: Calculate net sales = Sales - Sales return
Step 4: Prepare Trading Account:
- Opening stock + Net purchases + Carriage inwards + Wages + Direct expenses - Closing stock = Cost of goods sold
- Gross Profit = Net sales - Cost of goods sold

Step 5: Prepare Profit and Loss Account:
- Include indirect expenses (rent, miscellaneous expenses, salaries, advertising less sign board cost ₹4,000)
- Adjust provision for doubtful debts @5% on debtors
- Depreciate furniture by 10%
- Include interest on bank overdraft

Step 6: Calculate Net Profit or Loss

Step 7: Prepare Balance Sheet with adjusted figures

Final answers:
Gross Profit ₹1,09,000; Net loss ₹4,600; Total balance sheet ₹2,98,900 — Step-by-step:
1. Adjust trial balance figures for private purchases and provisions
2. Calculate depreciation on furniture
3. Prepare Trading Account to find Gross Profit
4. Prepare Profit & Loss Account to find Net Profit or Loss
5. Prepare Balance Sheet with adjusted assets and liabilities

All adjustments are incorporated as per instructions.

Accountancy

Accountancy — Study Notes

Meaning of Accounting

Objectives of Accounting

Functions of Accounting

Practice Questions — Accountancy

Accountancy — Study Guides & Articles

All 2 Chapters in Accountancy-II