CA Foundation Principles and Practice of Accounting 7.

CHAPTER -7
PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORS
UNIT -1: FINAL ACCOUNTS OF NON-MANUFACTURING ENTITIES:

UNIT -1: FINAL ACCOUNTS OF NON-MANUFACTURING ENTITIES

INTRODUCTION:
Non-manufacturing Entities:
Non-manufacturing entities are those business organisations that are engaged in the purchase & re-
sale of goods in their original form.
In other words, it can be said that these entities are into ‘Trading Business’.
Financial Statements (or Final Accounts):
The financial statements are prepared to ascertain –
The financial performance of the enterprise throughout the year (i.e., profits/losses incurred),
and the financial position of the business at the end of the year (with regards to the assets &
liabilities of the business).
Financial Statements are the systematically organized summary of all the Ledger Accounts
presented in a manner so as to provide detailed information about the financial position and
the performance of the enterprise.

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.2

MATCHING PRINCIPLE:
 To facilitate accurate measurement of profits, Matching Principle states that the revenues of the
period must correspond with the expenses incurred to generate such revenue, irrespective of cash
received or cash paid against it. That means in order to calculate correct gross profit sales should
be compared with the cost of sales and not the total cost or total purchases therefore as per the
matching principle extra cost which is debited in the Trading Account should be reversed by
accounting for the closing stock.
 Due to this reason, the entries for Outstanding Expenses are passed.
 It can be said that matching concept arises from the concepts of Accrual & Periodicity.
 If an expense has been incurred but against it income will be generated next year, the expense should
not be debited to the current year’s Profit and Loss Account, but should be carried forward and
shown in the Balance Sheet. (Prepaid Expenses)
 If payment is received in advance but the revenue is considered to be of next year as the sales are yet
to be made, it should be shown in the Balance Sheet on the liabilities side as “Income Received In
Advance” and should be credited to the Profit and Loss Account of the next year.

PREPARATION OF FINAL ACCOUNTS:

TRADING ACCOUNT:

 It is a part of the Income Statement& the first stage in the preparation of Final Accounts in a
Trading Concern.
 Trading Account is a Nominal Account which records only the Sales & Direct costs of Goods Sold
in order to ascertain the Gross Profits/Losses.
 The Gross Profit is the profit earned out of the Core Business Operations.

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.3

 Trading Account is based on the Matching Principle- The revenue from the sale of goods/services
are matched with the direct costs of goods sold.
 The cost of goods sold is calculated as follows-

Opening Inventory XXX

Add:- Purchases during the year (Net) XX
Add:- Direct Expenses XX
Less :- Closing Inventory (XX)

Cost of Goods Sold XXX

 The format of Trading Account is as below:-

Name of the Trader

Trading Account
For the year ended .…..
Dr. Cr.
Particulars Amt.(`) Particulars Amt. (`)
To Opening Inventory By Sales
To Purchases Less: Return Inwards
Less: Return Outwards
To Wages By Closing Inventory
Add: Outstanding Wages
To Carriage Inwards
To Royalty on Production
To Factory Expenses
To Customs Duty & Insurance
To Gas,Water and Fuel
To Gross Profit
(Transferred to Profit & Loss A/c)

Opening Inventory- In case of a trading concern, opening inventory contains various types of Finished
Goods. It is basically the closing inventory (finished goods unsold at the end of the year) of the previous
year which is recorded as the opening inventory of the current year.
Thus, in the first year of a business, there shall be No opening inventory.
Closing entry is as follows:
Trading A/c Dr.
To Opening Stock A/c

Purchases & Return Outwards: Purchase means cash & credit purchases of goods for the purpose of
resale.

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CA Foundation Principles and Practice of Accounting 7.4

Return Outwards or Purchase Returns has a credit balance depicting return of goods to the suppliers
from whom these were originally purchased.
As the purpose of designing financial statements is to
provide necessary information to the intended users;
thus, for the better understanding -Purchases is shown
in the debit side of Trading Account net of purchase
returns.
Closing entry for this purpose is as follows:
Purchases Return A/c Dr.(Net Purchases transferred to Trading account)
To Purchases A/c
Trading a/c Dr.
To Purchase A/c
Carriage Inwards:

Carriage Inwards is the carriage or freight

charges incurred to bring in the goods to the
godown. It is a direct expense.

Wages:Only wages paid to the workers to bring the goods into saleable condition are direct. All other
wages & salaries are indirect expenses. Thus, wages paid to workers in the godown/stores, should be
debited to the Trading Account.
If any amount is outstanding, it must also be
accounted for so that full wages for the period
concerned are charged to the Trading
Account. (Matching & Periodicity Principle)

Sales and Return Inwards: The sales account will have a credit balance indicating the total sales made
during the year.
The Return Inwards or sales return account will have a debit balance, showing the total amount of goods
returned by customer.
The net of the two amounts is entered on the credit side of the Trading Account.

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.5

Closing Inventory:It is the value of goods remaining unsold at the end of the period.
The valuation principle is cost or net realisable value whichever is lower.
The entry is-
Closing Inventory Account Dr.
To Trading Account

Alternatively, Closing Inventory if shown in Trial Balance means that it has been adjusted with
purchases by crediting the Purchase Account, i.e., the following entry has been passed-
Closing Inventory Account Dr.
To Purchases Account
The closing inventory is also shown in balance sheet on Assets side as a Current Asset.

Gross Profit: The balance in the Trading A/c is the Gross Profit or Gross Loss. It is transferred to the
Profit & Loss Account.

PROFIT AND LOSS ACCOUNT-

 It is a part of the Income Statement& is prepared after the Trading Account.

 Gross Profit/Loss is transferred to Profit & Loss Account and thereafter, all the indirect (Non-
Operating) incomes & indirect expenses are adjusted so as to arrive at the Net Profit/Loss.
 The Net Profit/Loss is transferred to Capital Account.
 Indirect Expenses are those expenses which are not directly associated with sale of goods. These
include administrative, selling and distribution expenses, etc.
 The format of Profit & Loss Account is as given below-

Profit & Loss Account for the year ended…..

Dr. Cr.
Particulars Amt. (`) Particulars Amt. (`)
To Gross Loss b/d By Gross Profit b/d

Management Expenses Other Income

To Salaries (administrative) By Discount Received
To Office rent, rates & taxes By Commission Received
To Printing & Stationery Non-Trading Income
To Telephone Charges By Bank Interest
To Postage & Telegrams By Rent of property let-out
To Insurance By Dividend from Shares
To Audit fees Abnormal Gains
To Legal Charges By Profit on sale of assets

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.6

To Electricity Charges
Maintenance Expenses By,Net Loss
(Transferred to capital
To Repairs & Renewals account)
To Depreciation
Selling & Distribution
Expenses
To Salaries (Selling Staff)
To Advertisement
To Godown Rent
To Carriage Outward
To Bad Debts
To Provision for Bad Debts
To Selling Commission
Financial Expenses
To Bank Charges
To Interest on Loans
To Discount on Bills
To, Discount allowed to
customers
Abnormal Losses
To Loss on sale of assets
To Loss by fire

To Net Profit
(Transferred to capital account)

Depreciation: Depreciation is the systematic allocation of the cost of asset over its useful life. It is an
indirect, non-cash expense.

Bad Debts: Bad debt is an amount that is irrecoverable from a debtor. It is a loss to the business entity.
Since it is no use showing the amount due still as an asset, the account of the customer concerned is
closed by being credited.
The following entries shall be passed-
1. Bad Debts Account Dr.
To, Debtor’s / Customer (by name) Account
2. Profit & Loss Account Dr.

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CA Foundation Principles and Practice of Accounting 7.7

To, Bad Debts A/c

If later on, the amount is recovered, it

should be treated as a gain.

CERTAIN ADJUSTMENTS AND THEIR TREATMENTS:

1. As per the Matching Principle & Periodicity Concept, the following adjustments must be made before
Final Accounts are drawn up. Appropriate accounts must be adjusted, both by providing for
expense outstanding and including income accrued and excluding expenses the benefit of which
extends beyond the year of account (i.e., Prepaid Expenses) as well as the income received in
advance.

Accounting Treatment for Expenses Outstanding -

Expense Account Dr.
To, Expenses Accrued/outstanding Account

For Example- Rent of ` 1,10,000 paid during the year. Rent for the month of March 20XX has not been
paid yet.

Journal Entry-
Rent A/c Dr 10,000 --
To, Outstanding Rent A/c -- 10,000
Profit & Loss Account for the year ended ….(Extract)
Dr. Cr.
Particulars Amt. (`) Particulars Amt. (`)
To rent Account 1,10,000
Add: Outstanding Rent 10,000 1,12,000
Balance Sheet (Extract)
Dr. Cr.
Liabilities Amt. (`) Asset Amt. (`)
Outstanding Rent 10,000

Accounting Treatment for Income Accrued-

Accrued Income Account Dr.
To, Income Account
This shall be shown in the Profit & Loss Account as an addition to Income Received& on the Asset
Side in the Balance Sheet

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CA Foundation Principles and Practice of Accounting 7.8

Carrying forward income received in advance-

Income Account Dr.
To, Income Received in Advance Account
This shall be shown in the Profit & Loss Account as a deduction from Income Received& on the
Liability Side in the Balance Sheet

Carrying forward income received in advance-

Income Account Dr.
To, Income Received in Advance Account
This shall be shown in the Profit & Loss Account as a deduction from Income Received& on the
Liability Side in the Balance Sheet

Accounting Treatment for Prepaid Expenses -

Prepaid Expense Account Dr.
To, Expense Account
This shall be shown in the Profit & Loss Account as a deduction from Expense & on the Asset Side
in the Balance Sheet

2. Provision for Bad and doubtful Debts-

When it is feared that some of the amount due from customers will not be collected, it is prudent to
recognise the anticipated loss by
reducing the current year’s profit and
placing the amount to the credit of a
special account called “Provision for Bad
and Doubtful Debts Account”.

a) Bad Debts are first written off against Provision for Bad and Doubtful Debts Account, if any or directly
by debiting Profit & Loss Account.
b) If the existing provision falls short of the required percentage of provision (as per the entity’s policy),
additional provision is created by debiting Profit & Loss Account.

3. Provision for Discount on Debtors-

It is created in the same manner as the Provision for Bad and Doubtful Debts Account.
It must be noted that this provision is calculated only on Realisable Debtors- the amount of provision
is required to be calculated after deducting the Bad Debts & Provision for Bad Debts from the total trade
receivables.

4. Provision for Depreciation: A provision for depreciation account is opened to accumulate the
balance of depreciation and the assets are carried at historical cost.

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.9

Depreciation Account Dr.

To, Provision for Depreciation Account

Or

Profit and Loss Account Dr.

To, Depreciation/ Provision for Depreciation Account

5. Other Provisions-
Whenever it is expected that a loss, the amount of which is not certain will occur, the proper course
is to create a provision for meeting the loss if and when it occurs.
All accounts showing provisions may appear in the Balance Sheet on the liability side. However, for
better presentation & understanding, it may also be shown as a deduction from the Assets.

For Example-1) The provision for Bad and Doubtful Debts and the Provision for Discount on Trade
receivables are deducted from the total book debts; and

2) The provision for Depreciation is deducted from the cost of the assets concerned.

6. Abnormal loss of Inventory by accident or fire-

Sometimes loss of goods occurs due to fire, theft, etc. If due to accident or fire, a portion of Inventory
is damaged, the following steps shall be followed-
Step 1- Ascertain the amount of loss

Step 2- Abnormal Loss Account is to be debited and Purchase Account or Trading Account is to
be credited.

Step 3- Abnormal Loss Account is to be transferred to Profit & Loss Account.

Step 4- If amount of loss is insured against risk, then Insurance Claim Account is to be
debited instead of Profit & Loss Account.
Till the money is not received from the insurance company, Insurance Claim Account will be
shown in the Assets side of the Balance Sheet.

Step 5- The uninsured amount shall be written off in Profit and Loss Account.

The following entries shall be passed-

1 Abnormal Loss Account Dr. XX - (Actual amount of loss)

To, Trading/ Profit & Loss Account - XX

2 Insurance Claim Account Dr. XX - (Claim admitted by Insurance Co)

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.10

Profit & Loss Account Dr. XX - (Claim not admitted)

To, Abnormal Loss Account - XX

7. Goods sent on Approvable as is-

If goods are sent to customer on sale or return on approval basis & approval of customer has not
been received by the year end, the cost of such goods sent shall be included in the Closing Stock.

8. Goods used other than for sale-

Goods may be used for some other purposes, such as distributed as free samples, used in
construction of any assets, given away as donation or used by proprietor for personal use.
The amount of such goods must be deducted from the Purchase Account& debited to respective
heads.

9. Commission based on profit-

Sometimes commission is payable to manager as a fixed percentage of net profit.
Being an indirect expense for the company, it shall be debited to Profit & Loss Account.
If the amount is not paid by the end of the year, it shall be shown in the Balance Sheet as a
Liability.

The commission may be paid as a certain percentage of net profit –before or after
charging such commission.

Case 1- Commission on net profit before charging such commission-

Commission = Net Profit before Commission x Rate of Commission

Case 2- Commission on net profit after charging such commission-

Commission = Net Profit before Commission x [Rate of Commission/ 100+ Rate of Commission]

IMPORTANT ASPECTS TO BE CONSIDERED DURING

PREPARATION OF FINAL ACCOUNTS:

 A clear distinction must be made between-

(i) Capital and Revenue Expenditures & Receipts
(ii) Personal and Business Incomes & Expenses

 Drawings : Drawing are the personal expenses of the Owner/

withdrawal of Capital invested by the owner/withdrawal of stock or goods for personal use. These
are shown as a reduction to capital in the Balance Sheet & not as an Expense in the Profit & Loss
Account.

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CA Foundation Principles and Practice of Accounting 7.11

 Income Tax: In case of Sole Proprietorship, income tax is treated as a personal expense. It is
debited to the Capital Account and not to the Profit and Loss Account.

 All material information to be disclosed in the Notes to Accounts

 Adherence to the cut-off procedures: income and expenses relating to a period of account should
be separated from those of another period.

COMPARISON BETWEEN INCOME STATEMENT AND POSITION STATEMENT:

Basis Income Statement Position Statement

Exhibits profit/loss from Exhibits assets & liabilities

Purpose
operations. of business.

Discloses expenditure Discloses the position of

Periodicity incurred & income earned assets & liabilities as on date.
throughout the year.

BALANCE SHEET:
Balance Sheet is a statement which sets out the assets and liabilities of a firm or an institution as
at a certain date.
It shows the financial position of a business on a particular date.
It provides information regarding assets owned by the business & the debts owed to the
Outsiders & also the capital of the owner invested into the business.
Sole proprietors generally present Balance Sheet in a horizontal form with “Capital and Liabilities” on
the left hand side and ‘Assets’ on the right-hand side.

Assets = Liabilities + Capital

Thus, the total of the two-sides of the Balance Sheet must match.
Specimen of Balance Sheet is given below-

Balance sheet as at....

Liabilities Amount (`) Assets Amount (`)

Capital A/c: Tangible Fixed Assets:

Balance Land & Building
Add/(less): Net profit/(loss) Plant and Machinery
(Less): Drawings Furniture & Fixtures
Vehicles

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CA Foundation Principles and Practice of Accounting 7.12

Long Term Loans:

Term Loans Intangibles:
Other Loans Goodwill
Patent Rights
Short Term Loans: Designs & Brand Names
Cash Credit
Overdrafts Investments:
Other Loans Long term Investments

Current Liabilities: Current Assets:

Trade payables Inventory in Trade
Outstanding Expenses Trade Receivables
Advances Taken Short term Investments
Prepayments
Provision: Advances
Provision for Bad Debts Bank Balances
Provision for Retirement
Benefits Cash in Hand
Provision for Taxation

MARSHALLING (ARRANGEMENT ) OF ASSETS & LIABILITIES:

The arrangement of Assets & Liabilities in a particular order in the Balance Sheet is called
Marshalling.

In Order of Liquidity:
Under this approach, the asset, which can be converted into cash first, are presented first. The
assets which take more time to convert into Cash are written last. Liabilities are also shown according
to the urgency with which payment has to be made. Short-term liabilities are written first, followed
by long-term liabilities & lastly the Capital.
Cash is the most-Liquid Asset.

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.13

The format of Balance Sheet as per this arrangement is given below-

Liabilities Amount (`) Assets Amount (`)

Bills Payable Cash in Hand

Trade Creditors Cash at Bank
Loans Government Securities
Outstanding Expenses Other Investments
Reserves & Surplus Bills Receivable
Capital Sundry Debtors
Stock
Furniture & Fixtures
Plant and Machinery
Land & Building

In order of Permanence:
Assets, which are to be used, for long terming the business and are not meant to be sold are
presented first. Assets, which are most liquid, such as cash in hand, are presented at the bottom.

Capital is shown first, followed by Long-term Liabilities & then Short-term Liabilities.

The format of Balance Sheet as per this arrangement is given below-

Liabilities Amount (`) Assets Amount (`)

Capital Land & Building

Reserves & Surplus Plant and Machinery
Outstanding Expenses Furniture & Fixtures
Loans Stock
Trade Creditors Sundry Debtors
Bills Payable Bills Receivable
Other Investments
Government Securities
Cash at Bank
Cash in Hand

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CA Foundation Principles and Practice of Accounting 7.14

CLASSIFICATION OF ASSETS & LIABILITIES:

 Current Assets: - these assets are meant to be converted into cash as quickly as possible. Generally
within one year.
 Long Term Assets: - Those that are meant to be used by the firm over a long period and not sold the
former type of assets is also called fixed assets.

OPENING ENTRY:
o A firm closes the books of account at the end of each year and starts new books in the beginning of each
year.
o The first entry in the journal is to record the closing balances of various assets and liabilities at the
end of the previous year as the opening balances in the beginning of the new year.
o The balance sheet prepared at the end of the year records these balances and is the basis for this first
entry. It is called the opening entry.

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CA Foundation Principles and Practice of Accounting 7.15

o The assets shown in the balance sheet are debited and the liabilities and the capital account
credited.

PROVISIONS , RESERVES & RESERVE FUND:

Provision-
When an anticipated liability or loss is likely or certain to be incurred, however, the amount or the
date on which they arise cannot be ascertained with reasonable accuracy, a provision is made.
Provision is a charge against profit for the purpose of providing any liability or loss.
It does not involve any payment of Cash.

Reserves-
Reserve is an amount set aside until it is needed for some particular use.
The reserves are primarily of two types: capital reserves and revenue reserves.
Capital Reserves are generally not distributed as profits. (Eg - profit from sale of fixed assets, etc)
Revenue Reserves are created by retaining profits. They are usually available for distribution as profits
in the future.

Reserve Fund-
Reserves represented by earmarking assets are called Reserve Fund. It signifies the amount standing
to the credit of the reserve that is invested outside the business in securities which are readily
realisable.
A reserve fund is usually created either to replace a fixed asset at the end of its useful life or to repay
a liability in future.

Provisions Reserves
Provision is a charge Reserve is an appropriation
1
against profit of profit
Creation of reserve has Creation of reserve depends
2 nothing to do with the on the amount of profits
amount of net profit earned by the business.
Reserves may be
earmarked against a Provisions are not earmarked
3
particular asset (Reserve against any particular asset
Fund)
Reserves are presented on Provisions may be presented
4 the Liability Side of the on the Liability Side/as a
Balance Sheet reduction from Assets

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.16

LIMITATIONS OF FINANCIAL STATEMENTS:

SUMMARY OF ALL ADJUSTMENTS:

Profit & Loss

Sr No Adjustment Trading Account Balance Sheet
Account
1 Closing Stock Credit Side - Asset Side
Outstanding Debit Side (Added to the respective Liability Side
2
Expenses Expenses)

3 Prepaid Expenses Debit Side (Deduct from the respective Asset Side
Expenses)
Income Credit Side (Added to the respective Asset Side
4
Outstanding Income)
Incomes
5 Received in Credit Side (Deduct from the respective Liability Side
Advance Income)
Asset Side
6 Bad Debts - Debit Side
(Deduct from Debtors)

Preparation of Final
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CA Foundation Principles and Practice of Accounting 7.17

Asset Side
Provision for Bad (Deduct from Debtors
7 - Debit Side
or Doubtful debts after additional bad
debts, if any)

Asset Side
Provision for
(Deduct from debtors
8 Discount on - Debit Side
after providing for
Debtors
provision for bad debts)

Asset Side
9 Depreciation - Debit Side (Deduct from Respective
Asset)

Interest on Liability Side

10 - Debit Side
Capital (Add to Capital)

Interest on Liability Side

11 Credit Side
Drawings (Deduct to Capital)

Debit Side Asset Side (with

Credit Side (with full
12 Loss by Fire (Actual loss, if insurance claim admitted
amount of loss)
any) by Insurance Co.)

Liability Side
Goods withdrawn Credit Side or Deduct
13 - (Deduct from Capital as
for personal use from Purchases.
Drawings)

Goods Distributed Credit Side or Deduct

14 Debit Side -
as free Samples from Purchases.

Asset Side. (Deduct from

Credit Side. (Deduct
Sale of Goods on Debtors the selling price
from Sales -the selling
Approval Basis, of such sales and show
15 price of goods sold and -
approval not yet the cost price of such
add to stock at cost
received sales along with closing
price.)
stock.)

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CA Foundation Principles and Practice of Accounting 7.18

UNIT -2: FINAL ACCOUNTS OF MANUFACTURING ENTITIES:

MANUFACTURING ACCOUNT-
 Manufacturing account is prepared to ascertain the cost of goods produced in an accounting
period to analyse the cost effectiveness of manufacturing activities.
 Manufacturing costs of finished goods are then transferred from the Manufacturing Account to
Trading Account.

Purpose-
(1) The total cost of manufacturing the finished products are set out in detail, with appropriate
classifications, the constituent elements of such cost.
(2) Provides details of factory cost and facilitates reconciliation of financial books with cost
records
(3) Also serves as a basis of comparison of manufacturing operations from year to year

Comparison between Manufacturing Account & Trading Account-

Manufacturing Account Trading Account
It shows the cost of It shows Gross Profit or
1
production Gross Loss
It deals with Raw Material It deals with Finished Goods
2
& Work in Progress Only.
It always has a Debit It may have a Debit or Credit
3
Balance Balance
Prepared only by Prepared by all types of
4
Manufacturing Businesses Businesses

MANUFACTURING COSTS-

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CA Foundation Principles and Practice of Accounting 7.19

 If there remain unfinished goods at the beginning and at the end of the accounting period, cost of
such unfinished goods (also termed as Work-In-Process) is shown in the Manufacturing Account

Direct Manufacturing Expenses-

Direct manufacturing expenses are costs, other than material or wages, which are incurred for a
specific product or saleable service.
Examples of direct manufacturing expenses are –
(i) Royalties for using license or technology if based on units produced,
(ii) Hi recharge of the plant and machinery used on hire, if based on units produced, etc.

(When royalty or hire charges are based on units produced, these expenses directly vary with
production.)

The aggregate of Direct Material + Direct Wages + Direct Expenses is called Prime Cost.

Indirect Manufacturing Expenses Or Overhead Expenses-

Indirect material means materials which cannot be linked directly with the units produced, for
example, stores consumed for repair and maintenance work, small tools, fuel and lubricating oil, etc.
Indirect wages are those which cannot be directly linked to the units produced, for example, wages
for maintenance works, holding pay, etc.
Indirect expenses are those which cannot be directly linked to the units produced, for example,
training expenses, depreciation of plant and machinery, depreciation of factory shed, insurance
premium for plant and machinery, factory shed, etc.

BY-PRODUCTS-
 In most manufacturing operations, the production of the main product is accompanied by the
production of a subsidiary product which has a value on sale.
 The subsidiary product is termed as a by-product because its production is not consciously
undertaken but results out of the production of the main product.
 This is a secondary product produced without incurring any additional expenses from the
same production process in which the main product is produced.
 They are generally valued at realizable value, if their costs cannot be separately identified.
 Accounting Treatment- The sale value of the by-product must be credited to Manufacturing
Account so as to reduce to that extent, the cost of manufacture of main product.

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CA Foundation Principles and Practice of Accounting 7.20

The Specimen of a Manufacturing Account is given below-

Manufacturing Account

Units Amt. Amt.

Particulars Particulars Units
(`) (`)

To Raw Material Consumed: By By-Products at net

Opening Inventory realizable value
By Closing work in
Add: Purchases progress
Less: Closing Inventory
To Direct Wages By Trading Account
To Direct Expenses: (Cost of Production)
Prime Cost
To Factory Overheads:
Royalty
Hire Charges
To Indirect Expenses:
Repairs & Maintenance
Depreciation
Factory Cost
To opening work in progress

Important Points to be considered-

 The Manufacturing Account should have an additional column showing the quantities as follows-
Raw Material-at the beginning, at the end of the year and the purchases during the year
Work in Progress - opening and closing amounts.
Finished Goods- quantity manufactured

 For determining the value of closing inventory, in the absence of specific instruction to the
contrary, it must be assumed that sales have been on “first in-first out” basis.

Illustration 1
Show by means of Journal Entries how the following items should be adjusted when preparing the Final
Accounts of a firm for the year ended 31st March, 2019.
(i) Closing stock at market value as on March 31, 2019 was ` 1,00,000 (cost ` 80,000). Stock is being
valued on a consistent basis of cost or market price whichever is lower.
(ii) No entry had been passed in the books for stock withdrawn from the business by the proprietor
` 10,000.

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CA Foundation Principles and Practice of Accounting 7.21

(iii) Legal charges include ` 20,000 for cost of stamp and registration of new building acquired during
the year.
(iv) Patents and trademarks were acquired at a cost of ` 28,000 in 2018 and every year
1/14th is being written-off.
(v) Proprietor had withdrawn for personal use goods for which the cost was ` 3,500 but the market
value on the date of withdrawal was ` 4,500. Sales were credited by ` 3,000.
(vi) Purchase include purchase of furniture for office use worth ` 10,000.
(vii) An amount of ` 25,000 received in respect of new capital introduced by the proprietor was
wrongly credited to Sundry Debtors Account.
(viii) An amount of ` 5,000 received from a debtor was wrongly credited to Sales Account.
(ix) Goods costing ` 8,000 were despatched out on 29th March. The sale, however, took place on 2nd
April, 2019, when an invoice of ` 9,000 was raised against the customer.

Solution
In the books of ……
Dr. Journal Cr.
Date Particulars L.F. ` `
2019 March 31 Closing Stock A/c (Note 1) Dr. 80,000
(i) To Trading A/c 80,000
(Being the adjustment for Closing Stock)
(ii) Drawing A/c Dr. 10,000
To Purchases A/c 10,000
(Being the adjustment for goods withdrawn by the proprietor)
(iii) Building A/c Dr. 20,000
To Legal Changes A/c 20,000
(Being cost of stamps & registration charges wrongly debited to
Legal Charges Account, now adjusted)
(iv) Depreciation on Patent & Trademarks A/c Dr. 2,000
To Patent & Trademarks A/c 2,000
(Being the amount of depreciation written-off)
(v) Drawing A/c (Note 2) Dr. 500
To Sales A/c ( ` 3,500 – ` 3,000) 500
(Being the adjustment for goods withdrawn by the proprietor)
(vi) Furniture A/c Dr. 10,000
To Purchases A/c 10,000
(Being the purchase of furniture for office use wrongly debited
to Purchases Account, now rectified)
(vii) Sunday Debtors A/c Dr. 25,000
To Capital A/c 25,000
(Being capital introduced by proprietor wrongly credited to
Sundry Debtors Account , now rectified)
(viii) Sales A/c Dr. 5,000
To Sundry Debtors A/c 5,000
(Being cash paid by debtor wrongly credited to Sales Account,
now rectified)
(ix) Goods-in-Transit A/c Dr. 8,000
To Trading A/c 8,000
(Being the adjustment for goods in transit)

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.22

Working Notes:
(1) Closing stock is to be valued at cost or market price whichever is lower. In this case, cost price is
` 80,000 which is lower than the market price ` 1,00,000. Therefore, only ` 80,000 is to be adjusted.
(2) Cost of goods withdrawn by the proprietor will be treated as drawings. The market value of goods `
4,500 is immaterial. Sales Account has already been credited by ` 3,000. Therefore, the balance (` 3,500
– ` 3, 000) ` 500 is to be adjusted by debiting Drawings Account and crediting Sales/Purchases Account.

Illustration 2
Prepare a Trading Account and a Profit and Loss Account for the year ended 31st December 2019 and
a Balance Sheet as on that date from the following Trial Balance and the adjustment items:
Particulars Dr.(`) Cr. (`) Particulars Dr. ( `) Cr. (`)
Opening stock 46,000 Office electricity expenses 9,400

Purchases and Sales 4,42,000 8,20,000 Telephone charges 4,400

Sales returns and Purchases 8,000 12,000 Cash at Bank 18,000

returns

Discount received 2,200 Printing and Stationery 11,200

Wages 43,500 Postage stamps 1,090

Salaries 66,000 Furniture 2,00,000

Carriage inwards 39,100 Petty cash 210

Advertising expenses 10,200 Prepaid printing 1,200

Bills receivable and payable 9,000 10,000 Insurance premium 3,000

12% Bank loan (taken on 1st 1,50,000 Carriage outwards 12,000

November 2019)

Office equipment 1,99,700 Bad debts 800

Land and building 3,36,000 Interest on Bank loan paid 1,500

Provision for doubtful debts 3,200 Capital Account 4,76,900

Sundry Debtors and Sundry 45,000 40,000 Reserve for Discount on 1,700
Creditors creditors

Rates and taxes 5,300 TOTAL 15,14,300 15,14,300

Adjustment items :
(a) Closing stock was valued at 38,000 on 31st December 2019.
(b) Goods worth 2,500 were distributed by salesmen as free samples, but no entry has been made for this.
(c) Depreciate furniture by 7.5% p.a. and office equipment by 10% p.a.
(d) Reserve for discount on creditors to be maintained at 2%.
(e) Provision for doubtful debts to be maintained at 2%.

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.23

(f) Create a provision for discount on debtors at 2%

(g) Commission of ` 1,300 was earned but not yet received.
(h) Rates and taxes of`800 was paid in advance for 2020.
(i) Creditors include a debt of ` 4,000 to Mr Nayak who is also included in the list of debtors for` 5,000 and,
therefore, to be set off before calculating the reserves.

Solution
Trading and Profit & Loss Account for the year ended 31st December, 2019
Dr. Cr.
` ` ` `
To Opening Stock 46,000 By Sales 8,20,000
To Purchases 4,42,000 Less: Sales Returns 8,000 8,12,000
Less : Purchases Returns 12,000 4,30,000 By Advertisement expenses 2,500

To Wages 43,500 By Closing stock 38,000

To Carriage inward 39,100
To Gross Profit c/d 2,93,900
8,52,500 8,52,500
To Salaries 66.000By Gross Profit b/d 2,93,900
To Advertisement expenses 10,200 By Reserve for discount on 1,220
creditors (Note 1)
Add Goods distributed 2,500 12,700 By Accrued commission 1,300
as free sample
To Bank interest 1,500 By Provision for Doubtful
debts:
Add: Outstanding 1,500 3,00 Old 3,200
To Rates & Taxes 5,300 Less : New 5% on 2,050 1,150
` 41,000
Less: Paid in advance 800 4,500
To Office electricity 9,400
To Telephone charges 4,400
To Printing & stationery 11,200
To Postage & stamps 1,090
To Insurance premium 3,000
To Carriage outwards 12,000
To Bad debts 800
To Depreciation :
On Furniture 15,000
On Office equipment 19,970 34,970
To Prov. For disc. On 779
Debtors @
2% on ` 38,950
To Net Profit (transferred to 1,33,731
capital)
2,97,570 2,97,570

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.24

Balance Sheet as at 31st December, 2019

Liabilities ` ` Assets ` `
Capital (1.1.2019) 4,76,900 Land & Building 3,36,000
Add: Net Profit 1,33,731 6,10,631 Office Equipment 1,99,700
12% Bank Loan 1,50,000 Less: Depreciation 19,970 1,79,739
Add: Outstanding Interest 1,500 1,51,500 Furniture 2,00,000
Sundry Creditors 40,000 Less: Depreciation 15,000 1,85,000
Less: Debtors Set-off 4,000 Closing Stock 38,000
36,000 Sundry Debtors 45,000
Less: Reserve for Discount 720 35,280 Less: Creditors set-off 4,000
on Creditors
Bills Payable 10,000 41,000
Less: Provision for 2,050
doubtful debts
38,950
Less: Provision for 779 38,171
discount on Debtors
Bill Receivable 9,000
Cash at Bank 18,000
Petty Cash 210
Rates Paid in Advance 800
Accrued Commission 1,300
Prepaid Printing 1,200
8,07,411 8,07,411
Working Notes: (1) When Reserve for Discount on Creditors Account is maintained, any discount received is
credited to this account.
For creating a new reserve, the balance of Reserve for Discount on Creditors is also taken into consideration.
Thus,
Dr. Reserve for Discount on Creditors Account Cr.
Particulars ` Particulars `
To Balance b/d 1,700 By Discount Received A/c 2,200
To Profit and Loss A/c (Balancing figure) 1,220 By Balance c/d ` (2% of 36,000) 720
2,920 2,920

(2) Provision for Doubtful Debts and Discount `

Debtors as per Trial balance 45,000
Less: Set-off with creditors 4,000
41,000
Less: Provision for bad debts (new)5% 2,050
38,950
Less: Provision for Discount @2% 779
38,171

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.25

Illustration 3
The following is the Trial Balance of Mr Bharat on 31st December, 2019:
Particulars Dr.` Cr. ` Particulars Dr.` Cr. `
Capital 4,000 Bills payable 560
Sundry creditors 5,200 Bills Receivable 720
Plant & Machinery 5,000 Returns inwards 930
Office furniture and fittings 260 Provision for doubtful debts 250
Stock as on 1 January, 1997
st 4,800 Drawings 700
Motor van 1,200 Returns Outwards 550
Sundry debtors 4,570 Rent 600
Cash in hand 40 Factory lighting and heating 80
Cash at bank 650 Insurance 630
Wages 15,000 General expenses 100
Salaries 1,400 Bad debts 250
Purchases 21,350 Discount 650 370
Sales 48,000 TOTAL 58,930 58,930
The following adjustments are to be made :
(i) Stock on 31st December, 2019 ` 5,200.
(ii) 3 months factory lighting and heating is due, but not paid ` 30;
(iii) 5% depreciation to be written-off on furniture;
(iv) Write-off further bad debts ` 70;
(v) The provision for doubtful debts to be increased to ` 300 and provision for discount on debtors @2% to
be made:
(vi) During the year machinery was purchased for ` 2,000, but it was debited to Purchases Account.
You are required to make the necessary Journal entries and prepare Trading and Profit and Loss Account
and the Balance Sheet.

Solution
In the books of Bharat
Dr. Journal Cr.
Date Particulars ` `
2019 Adjustment Entries
Dec. Factory Lighting and Heating A/c Dr. 30
31 To Outstanding Factory Lighting and Heating A/c 30
(Being adjustment for outstanding factory lighting and heating)
Depreciation A/c Dr. 13
To Office Furniture & Fittings A/c 13
(Being amount written-off as depreciation on furniture @ 5% on ` 260)
Bad Debts A/c Dr. 70
To Sundry Debtors A/c 70
(Being bad debts written-off)
Plant & Machinery A/c Dr. 2,000
To Purchases A/c 2,000

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.26

(Being purchase of machinery wrongly debited to Purchases Account,

now rectified)
Profit & Loss A/c Dr. 134
To Provision for Bad & Doubtful Debts A/c (` 300 – ` 250) 50
To Provision for Discount on Debtors A/c 84
(Being the creation of necessary provision for bad and doubtful debts
and discount on Debtors)
Closing Entries
Trading A/c Dr. 38,710
To Opening Stock A/c 4,800
To Purchases A/c 18,800
To Wages A/c 15,000
To Factory Lighting and Heating A/c 110
(Being various accounts transferred to the Trading Account)
Sales A/c Dr. 47,070
To Trading A/c 47,070
(Being Sales Account transferred to the Trading Account)
Closing Stock A/c Dr. 5,200
To Trading A/c 5,200
(Being closing stock transferred to the credit of the Trading Account)
Trading A/c Dr. 13,560
To Profit & Loss A/c 13,560
(Being gross profit transferred to Profit & Loss Account)
Profit & Loss A/c Dr. 3,713
To Salaries A/c 1,400
To Rent A/c 600
To Insurance A/c 630
To General Expenses A/c 100
To Discount A/c 650
To Bad Debts A/c 320
To Depreciation on Furniture & Fittings A/c 13
(Being various expenses transferred to the debit of the Profit & Loss
Account
Discount A/c Dr. 370
To Profit & Loss A/c 370
(Being discount received transferred to the credit of the Profit & Loss
Account)
Profit & Loss A/c Dr. 10,083
To Capital A/c 10,083
(Being net profit transferred to Capital Account)

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.27

Bharat
Dr. Trading and Profit & Loss Account for the year ended 31st December, 2019 Cr.
Particulars ` ` Particulars ` `
To Opening stock 4,800 By Sales 48,000
To Purchases 21,350 Less: Returns inwards 930 47,070
Less: Returns outwards 550 By Closing stock 5,200
20,800
Less: Machinery purchase 2,000 18,800
To Wages 15,000
To Factory lighting & heating 80
Add: Outstanding 30 110
To Gross Profit c/d 13,560
52,270 52,270
To Salaries 1,400 By Gross Profit b/d 13,560
To Rent 600 By Discount 370
To Insurance 630
To General expenses 100
To Discount 650
To Bad debts 250
Add: Further bad debts 70 320
To Provision for doubtful debts
New 300
Less: Old 250 50
To Prov. For disc. On debtors @2% on ` 84
4,200
To Depreciation on furniture @5%on ` 13
260
To Net Profit (transferred to Capital 10,083
Account)
13,930 13,930
Balance Sheet of Bharat as at 31st December, 2019
Liabilities ` ` Assets ` `
Capital Opening balance 4,000 Plant & Machinery 5,000
Add: Net Profit 10,083 Addition 2,000 7,000
14,083 Motor van 1,200
Less: Drawings 700 13,383 Office furniture 260
Bills payable 560 Less: Depreciation @5% 13 247
Sundry creditors 5,200 Sundry debtors 4,570
Outstanding factory lighting 30 Less: Further bad debts 70
& heating
4,500
Less: Provision for bad debts 300
4,200

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.28

Less: Provision for discount 84 4,116

on debtors
Closing stock 5,200
Bills receivable 720
Cash at bank 650
Cash in hand 40
19,173 19,173

Illustration 4
From the following Trial Balance of Hari and additional information prepare Trading and Profit and
Loss Account for the year ended 31st March, 2019 and a Balance Sheet as on that date:
Particulars Dr. ` Cr. ` Particulars Dr. ` Cr. `
Capital 1,00,000 Bad Debt written-off 7,000
Furniture 20,000 Creditors 1,20,000
Purchases 1,50,000 Drawings 24,000
Debtors 2,00,000 Provision for bad debts 6,000
Interest earned 4,000 Printing and Stationery 8,000
Salaries 30,000 Insurance 12,000
Sales 3,21,000 Opening stock 50,000
Purchases returns 5,000 Office expenses 12,000
Wages 20,000 Provision for Depreciation 2,000
Rent 15,000
Sales Return 10,000 TOTAL 5,58,000 5,58,000

Additional information:
(1) Depreciate Furniture by 10% on original cost.
(2) A Provision for Doubtful Debts is to be created to the extent of 5% on Sundry Debtors.
(3) Salaries for the month of March 2019 amounting to ` 3,000 were unpaid which must be provided
for. However, salaries included ` 2,000 paid in advance.
(4) Insurance amounting to ` 2,000 is prepaid.
(5) Provide for outstanding office expenses ` 8,000.
(6) Stock used for private purpose ` 6,000.
(7) Closing Stock-in-trading ` 60,000.
Solution
Hari
Dr. Trading and Profit & Loss Account for the year ended 31st March, 2019 Cr.
Particulars ` ` Particulars ` `
To Opening Stock 50,000 By Sales 3,21,000
To Purchases 1,50,000 Less : Sales Returns 10,000 3,11,000
Less: Purchase Returns 5,000 By Closing Stock 60,000
1,45,000
Less: Goods taken for personal use 6,000 1,39,000
To Wages 20,000
To Gross Profit c/d 1,62,000

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.29

3,71,000 3,71,000
To Salaries 30,000 By Gross Profit b/d 1,62,000
Add: Outstanding 3,000 By Interest 4,000
33,000
Less: Prepaid 2,000 31,000
To Rent 15,000
To Printing and Stationery 8,000
To Insurance 12,000
Less: Prepaid 2,000 10,000
To Office expenses 12,000
Add: Outstanding 8,000 20,000
To Bad debts 7,000
To Provision for Bad debts:
New 10,000
Less: Old 6,000 4,000
To Provision for depreciation 2,000
(10% of Rs 20,000)
To Net Profit (transferred to capital) 69,000
1,66,000 1,66,000

Balance Sheet of Hari as at 31st March, 2019

Liabilities ` ` Assets ` `
Capital: Furniture (at cost) 20,000
Opening balance 1,00,000 Less: Provision for Depreciation
Less: Net Profit during the 69,000 (` 2,000 + ` 2,000) 4,000 16,000
year
1,69,000 Stock-in-trade 60,000
Less: Drawings:(24,000+6,000) 30,000 1,39,000 Debtors 2,00,000
Creditors 1,20,000 Less: Provision for Bad debts 10,000 1,90,000
Outstanding Liabilities : Prepaid expenses:
Salaries 3,000 Salaries 2,000
Office Expenses 8,000 11,000 Insurance 2,000 4,000
2,70,000 2,70,000

Illustration 5.
The following is the schedule of balances as on 31.3.19 extracted from the books of Shri Gavaskar,
who carries on business under the same name and style of M/s Gavaskar Viswanath & Co., at Mumbai:
Particulars Dr.` Cr. ` Particulars Dr. ` Cr. `
Cash in hand 1,400 Interest on loan from Viswanath 2,700
Cash at bank 2,600 Rates & taxes 2,100
Sundry Debtors 86,000 Discount allowed to Debtors 2,400
Stock on 1.4.2018 62,000 Discount received from creditors 1,600
Furniture & fixtures 21,400 Freight on purchases 1,200
Office equipment 16,000 Carriage outwards 2,000
Buildings 60,000 Drawings 12,000
Motor car 20,000 Printing and Stationery 1,800
Sundry creditors 43,000 Electricity charges 2,200

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.30

Loan from Viswanth 30,000 Insurance premium 5,500

Provision for bad debts 3,000 General office expenses 3,000
Purchases 1,40,000 Bad debts 2,000
Purchase Returns 2,600 Bank charges 1,600
Sales 2,30,000 Motor car expenses 3,600
Sales Returns 4,200 Capital A/c 1,62,000
Salaries 11,000
Rent for godown 5,500 TOTAL 4,72,200 4,72,200
Prepare Trading and Profit and Loss Account for the year ended 31st
March, 2019 and the Balance
Sheet as at that date after making provision for the following:
1. Depreciate: (a) Building used for business by 5 percent: (b) Furniture and fixtures by 10 percent:
One Steel table purchased during the year for ` 1,400 was sold for same price but the sale proceeds
were wrongly credited to Sales Account : (c) Office equipment by 15 percent; Purchase of a
typewriter during the year for ` 4,000 has been wrongly debited to purchase ; and (d) Motor car
by 20 percent.
2. Value of stock at the close of the year was ` 44,000.
3. One month’s rent for godown is outstanding.
4. One month’s salary is outstanding.
5. Interest on loan from Viswanath is payable at 12 percent per annum, this loan was taken on
1.5.2018.
6. Provision for bad debts is to be maintained at 5 per cent of Sundry Debtors.
7. Insurance premium includes ` 4,000 paid towards proprietor’s life insurance policy and the
balance of the insurance charges cover the period from 1.4.2018 to 30.6.2019.
8. Half of the buildings are used for residential purposes of Shri Gavaskar.
Solution
M/s Gavaskar Viswanath& Co.
Dr. Trading and Profit & Loss Account for the year ended 31stMarch , 2019 Cr.
Particulars ` ` Particulars ` `
To Opening stock 62,000 By Sales 2,30,000
To Purchases 1,40,000 Less: Sale of furniture 1,400
included in sale
Less: Typewriter 4,000 2,28,600
included in purchases
1,36,000 Less: Sales Returns 4,200 2,24,400
Less: Purchase Returns 2,600 1,33,400 By Closing stock 44,000
To Freight on purchase 1,200
To Gross Profit c/d 71,800
2,68,400 2,68,400
To Salaries 11,000 By Gross Profit b/d 71,800
Add: Outstanding 1,000 12,000 By Discount received 1,600
To Rent for Godown 5,500
Add: Outstanding 500 6,000
To Provision for Doubtful debts
New 4,300

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.31

Less: Old 3,000 1,300

To Rent and taxes 2,100
To Discount allowed 2,400
To Carriage outwards 2,000
To Printing and stationery 1,800
To Electricity charges 2,200
To insurance premium (Note 1,200
1)
To Depreciation (Note 2) 10,500
To General office expenses 3,000
To Bad debts 2,000
To Bank charges 1,600
To Interest on loan 2,700
Add: Outstanding (Note 600 3,300
3)
To Motor car 3,600
To Net Profit (transferred to 18,400
capital)
73,400 73,4000
Balance Sheet of M/s Gavaskar Viswanath& Co. as at 31st March, 2019
Liabilities ` ` Assets ` `
Capital Account 1,62,000 Fixed Assets
Add: Net Profit 18,400 Building 60,000
1,80,400 Less: Depreciation 3,000 57,000
Less: Drawings 12,000 Motor Car 20,000
1,68,400 Less: Depreciation 4,000 16,000
Less: Insurance 4,000 Office equipment 20,000
premium (` 16,000 + ` 4,000)
Less: ½ of 1,500 1,62,900 Less: Depreciation 3,000 17,000
Depreciation of Buildings
Loan from Viswanath 30,000 Furniture & fixtures (`21,400 - 20,000
`1,400)
Add: Outstanding 600 30,600 Less: Depreciation 2,000 18,000
Sundry Creditors 43,000 Current Assets
Outstanding expenses : Stock in trade 44,000
Salaries 1,000 Sundry Debtors 86,000
Rent 500 1,500 Less: Provision for doubtful debts 4,300 81,700
Cash at bank 2,600
Cash in hand 1,400
Prepaid insurance (Note 1) 300
2,38,000 2,38,000
Working Notes:
(1) Insurance Premium ` (2) Calculation of Depreciation `
Insurance premium as per Trial 5,500 On Building @5% on ` 60,000 3,000
Balance
Less: Proprietor’s life insurance 4,000 Less: ½ for private use 1,500 1,500
policy premium
Premium for 15 months 1,500 On Motor car @20% on ` 20,000 4,000

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.32

Less: Prepaid for 3 months 300 On Furniture & fittings @10% 2,000
(` 21,400 – `1,400)
Charged to Profit and Loss A/c 1,200 On Office equipment as per Trial Balance 16,000
Addition (typewriter) 4,000
20,000 3,000
10,500
(3) Calculation of Interest on Loan : (` 30,000 x12 x 11)/100 x 12 = 3,300;
Outstanding ` 3,300 –` 2,700 = ` 600.

Illustration 6
Following is the Trial Balance of Sri Rahul as at 31.12.2019. You are required to prepare Trading and
Profit and Loss Account for the year ended 31.12.2019 and a Balance Sheet as on that date after
making necessary adjustments:
Debit Balances ` Credit Balances `
Purchases 60,000 Sales 1,00,000
Sales Ledger Balances 30,400 Purchases Ledger Balances 24,400
Returns Inward 2,000 Discount Received 600
Discount Allowed 2,000 Returns Outward 2,400
Building 44,000 Capital 53,200
Depreciation on Building 2,000 Suspense Account 2,000
Income Tax 2,000 Goods Sent on Consignment 5,000
Wages 4,000 Profit on Consignment 1,000
Salaries 6,000 Apprenticeship Premium (for the year 2,400
ending 31.3.2020)
Consignment Stock(31.2.2019) 1,200 Provision for Bad Debts 2,000
Stock-in-Trade(1.1.2019) 20,000 Commission 1,600
Trade Expenses 4,000
Insurance 400
Cash at Bank 12,600
Deposit with Asha 4,000
1,94,600 1,94,600
Adjustments :
(i) Stock-in-trade on 31.12.2019 was valued at ` 20,000.
(ii) Stock valued at ` 4,000 was destroyed by fire on 25.12.2019 for which insurance company admitted a claim
of ` 2,400 only.
(iii) Deposit with Asha was realized together with interest @ 10% p.a. for 6 months and deposited the same into
Fixed Deposit Account with Bank of India on 1.10.2019 bearing interest @ 16% p.a., but no entry had since
been made.
(iv) Out of purchases, goods of ` 4,000 was distributed as free samples.
(v) Suspense Account represents a cheque received from Bapi, a customer, in settlement of ` 2,400 due from
him. The cheque was duly deposited and credited by the Bank.
(vi) Maintain provision for bad debts @5% on Debtors and provision for discount @ 2% on both Debtors
and Creditors.

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.33

Solution
Sri Rahul
Dr. Trading and Profit & Loss Account for the year ended 31st December, 2019 Cr.
Particulars ` ` Particulars ` `
To Stock-in-trade 20,000 By Sales 1,00,000
To Purchases 60,000 Less: Returns Inward 2,000 98,000
Less: Goods distributed as 4,000 By Stock Lost by Fire 4,000
free sample
56,000 By Closing Stock 20,000
Less: Goods Sent on 5,000
Consignment
51,000
Less: Returns Outward 2,400 48,600
To Wages 4,000
To Gross Profit c/d 49,400
1,22,000 1,22,000
To Salaries 6,000 By Gross Profit b/d 49,400
To Trade Expenses 4,000 By Profit on Consignment 1,000
To Insurance 400 By Discount Received 600
To Discount Allowed 2,000 By Apprenticeship 2,400
Premium
Add: Discount Allowed to 400 2,400 Less: Received in 600 1,800
Bapi (Note 2) Advance
To Depreciation on 2,000 By Commission 1,600
Building
To Prov. For Discount on 532 By Interest on Deposit 200
Debtors(Note 4) with Asha
To Stock Lost by Fire (` 1,600 By Accrued Interest on 168
4,000 – ` 2,400) Deposit with SBI
To Advertisement 4,000 By Provision for Bad
Debts:
(Goods distributed as Old 2,000
free sample)
To Net Profit (transferred 34,924 Less: New (Note 3) 1,400 600
to Capital)
By Reserve for Disc. On 488
Creditors
(Note 5)
55,856 55,856

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.34

Balance Sheet of Sri Rahul as at 31st December, 2019

Liabilities ` ` Assets ` `
Capital: Building 44,000
Opening balance 53,200 Stock-in-trade 20,000
Add: Net Profit 34,924 Consignment Stock 1,200
88,124 Sales Ledger Balances 28,000
(30,400-2,400)
Less: Income Tax 2,000 86,124 Less: Provision for Bad 1,400
(Drawings) Debts (Note 3)
Purchase Ledger 24,400 26,600
Balances (Note 6)
Less: Reserve for 488 23,912 Less: Provision for 532 26,068
Discount on Creditors Discount on Debtors
Apprenticeship Premium 600 Deposit with Bank of India 4,200
recd. In advance
Accrued Interest on 168
Deposit with BOI
Insurance Claim 2,400
Cash and Bank 12,600
1,10,636 1,10,636
Working Notes:
(1) Deposit with Asha was realized along with in interest @10% p.a. on 30.6.2019 and ` 4,200 was received. It was
deposited with Bank of India at a interest of 16% p.a. on 1.10.1993 Therefore, accrued interest on this deposit
will be ` 168 (3/12 x 16/100 x ` 4,200)
(2) For adjustment of Suspense Account, the following entry is to be passed:
Suspense Account Dr. `2,000
Discount Allowed Account Dr. `400
To Sundry Debtors Account `2,400
(3) Calculation of Provision for Bad Debts
Sales Ledger Balance (i.e. Sundry Debtors) `30,400
Less: Adjustment of cheque received from Bapi (2,000)
Less: Discount allowed to Bapi (400)
Final balance of Debtors 28,000
Provision for bad debts to be maintained @5% on Debtors, i.e. 5% of ` 28,000 = ` 1,400.
(4) Provision for discount on debtors will be @2% on ` (28,000 – 1,400) = 532.
(5) Reserve for discount on creditors will be @ 2% on ` 24,400 = ` 488.
(6) Purchases Ledger balances means Sundry Creditors. Similarly, Sales Ledger balances means Sundry Debtors.

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.35

Illustration 7
From the following Trial Balance of Sri Sengupta and the additional information, prepare a Trading
and Profit and Loss Account for the year ending on 31.12.2019 and a Balance Sheet as at that date:
Debit Balances ` Credit Balances `
Materials Consumed 1,75,000 Capital 75,000
Stock on 31.12.2019 37,500 Sales 3,00,000
Debtors 30,000 Creditors 25,000
Wages – Productive 45,000 Commission Received 1,500
Wages – Others 7,500 Special Rebate Received 2,000
Salaries 7,500 Suspense Account – Sri Roy 27,500
Electric Charges 2,500
Freight and Insurance on Purchases 1,500
Delivery Charges 1,000
Depreciation 5,000
Commission Paid 1,000
Special Rebate Allowed 1,000
Plant and Machinery 32,500
Furniture 6,500
Land and Building 47,500
Suspense Account – Smt. Banerjee 10,000
Drawings 7,500
Cash 2,000
Bank 10,500
4,31,000 4, 31,000
Additional information :
(a) Salary includes the proprietor’s salary of `3,000 for the year.
(b) Suspense Account of Sri Roy represents a cheque received from him against sale proceeds of
goods sent to him on consignment. Goods costing `32,500 were sent to him on consignment.
4/5th of the goods were sold by him for `45,000. He is entitled to a commission at 10% sale
proceeds. The only entry passed in this connection was for the cheque received from him.
(c) Suspense Account of Smt. Banerjee represents an advance of `10,000 to her in connection with
a joint venture agreement entered into with her for which she is to get 2/5th share of profit. It is
ascertained that the venture has earned a profit of `7,500.
(d) The scrutiny of the Schedule of Debtors reveals the following: (i) `7,500 fully realizable; (ii)
`5,000 –75% realizable; (iii) `2,500 – 50% realizable; (iv) Provision for doubtful debts has to be
provided for at 5% on the balance besides the amount that may be required as above.

Solution

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.36

Sri Sengupta
Dr. Trading and Profit & Loss Account for the year ended 31st December, 2019 Cr.
Particulars ` Particulars `
To Materials Consumed 1,75,000 By Sales 3,00,000
To Wages – Productive 45,000 By Goods Sent on Consignment 32,500
To Freight and insurance on Purchases 1,500
To Gross Profit c/d 1,11,000
3,32,500 3,32,500
To Wages – Others 7,500 By Gross Profit b/d 1,11,000
To Salaries 7,500 By Commission Received 1,500
Less: Proprietor’s salary 3,000 4,500 By Special Rebate Received 2,000
To Electric Charges 2,500 By Profit on Consignment (Note 1) 14,500
To Delivery Charges 1,000 By Profit on Joint Venture 4,500
(3/5th of ` 7,500)
To Depreciation 5,000
To Commission Paid 1,000
To Special Rebate Allowed 1,000
To Provision for Doubtful Debts (Note 3,250
4)
To Net Profit (transferred to Capital) 1,07,750
1,33,5000 1,33,500

Balance Sheet of Sri Sengupta as at 31st December, 2019

Liabilities ` ` Assets ` `
Capital: Land and Building 47,500
Opening Balance 75,000 Plant and Machinery 32,500
Add: Net Profit 1,07,750 Furniture 6,500
1,82,750 Closing Stock 37,500
Less: Drawing: 10,500 1,72,250 Stock on Consignment 6,500
(7,500 + 3,000)
Creditors 25,000 Debtors 30,000
Less: Provision for 3,250 26,750
Doubtful Debts
Amount Due from Smt. 14,500
Banerjee (Note 3)
Amount Due from Sri Roy 13,000
(Note 2)
Cash at Bank 10,500
Cash in Hand 2,000
1,97,250 1,97,250

Working Note:
(1)

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.37

Dr. Consignment to Sri Roy Account Cr.

Particulars ` Particulars `
To Goods Sent on Consignment A/c 32,500 By Sri Roy A/c – Sales Proceeds 45,000
To Sri Roy A/c – Commission 10% on ` 45,000 By Stock on Consignment A/c (1/5 of 6,500
45,000 32,500)
To Profit on Consignment A/c 14,500
51,500 51,500

(2)
Dr. Sri Roy Account Cr.
Particulars ` Particulars `
To Consignment to Sri Roy A/c 45,500 By Suspense A/c – Sri Roy 27,500
By Consignment A/c (commission) 4,500
By Balance c/d 13,000
45,500 45,500

(3)
Dr. Smt. Banerjee Account Cr.
Particulars ` Particulars `
To Suspense A/c – Smt. Banerjee 10,000 By Balance c/d 14,500
To Share of Profit – 3/5 of ` 7,500 4,500
14,500 14,500

(4) Calculation of Provision for Doubtful Debts `

(i) On `7,500 Nil
(ii) On `5,000 @ 25% 1,250
(iii) On `2,500 @ 50% 1,250
(iv) On `15,000 @ 5% 750 3,250

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.38

PRACTICE PROBLEMS
1. From the below mentioned information, prepare a Trading Account of M/s. Ketan Traders
for the year ended 31st March, 2019:

Particulars Amt (`) Particulars Amt (`)

Wages 16,000 Stock (1.04.2018) 22,000
Royalties 11,000 Sales 3,80,000
Sales Returns 24,000 Purchases 1,90,000
Goods withdrawn by Ketan Purchases Returns 6,400
for Personal use 16,000 Manufacturing Expenses 8,400
Factory Rent 4,200 Motive Power 16,000
Stock (31.03.2019) 36,000 Freight 7,400

2. From the following Trial balance of J D & Sons, you are required to prepare Trading Account
and Profit & Loss A/c for the year ended 31st March, 2018.

Debit Balances Amt (`) Credit Balances Amt (`)

Wages 9,200 Purchases Returns 6,520

Purchases 66,800 Sales 1,52,900
Carriage Inward 3,350 Commission received 18,000
Sales returns 4,800 Rent Received 9,000
Opening Stock 31,300 Discount Received 4,600
Salary 17,400
Royalty 4,800
Rent, Rates & Taxes 12,680
Bad debts 500
Carriage Outward 3,720
Printing & Stationery 2,400
Advertisement 18,000
Discount Allowed 1,520
Insurance 5,800
Factory Rent 7,000
Commission paid 1,800
1,91,020 1,91,020
Adjustment: 1) Closing stock ` 56, 850

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.39

3. Mr. Shyamal runs a factory, which produces detergents. Following details were available in
respect of his manufacturing activities for the year ended 31-03-2019.
`
Opening work-in-progress (9000 units) 26,000
Closing work-in-progress (14,000 units) 48,000
Opening inventory of Raw Materials 2,60,000
Closing inventory of Raw Materials 3,20,000
Purchases 8,20,000
Hire charges of Machinery @ ` 0.70 per unit
Manufactured
Hire charges of factory 2,60,000
Direct wages-contracted @ ` 0.80 per unit
Manufactured
and @ ` 0.40 per unit of closing W.I.P.
Repairs and maintenance 1,80,000
Units produced-5,00,000 units
Required a Manufacturing Account of Mr. Shyamal for the year ended 31-03-2019. (Nov 2019)

4. Mr. Fazhil is a proprietor in business of trading. An abstract of his Trading and P&L account is
as follows:

Trading and P&L A/c for the year ended 31st March, 2018
Particulars (`) Particulars (`)
To Cost of Goods sold 22,00,000 By Sales 45,00,000
To Gross Profit C/d ? 45,00,000
By Gross Profit B/d ?
To Salaries paid 12,00,000 By Other Income 45,000
To General Expenses 6,00,000
To Selling Expenses ?
To Commission to Manager (On
net profit before charging such
commission) 1,00,000
To Net Profit ?
? ?
Selling expenses amount to 1% of total Sales.
You are required to compute the missing figures. (Nov 2018)

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.40

5. The following are the balances extracted from the books of Shri Raghuramas on 31.03.2018, who
carries on business under the name and style of M/s Raghuram and Associates at Chennai:

Particulars Debit (`) Credit (`)

Capital A/c 14,11,400
Purchases 12,00,000
Purchase Returns 18,000
Sales 15,00,000
Sales Returns 24,000
Freight Inwards 62,000
Carriage Outwards 8,500
Rent of Godown 55,000
Rates and Taxes 24,000
Salaries 72,000
Discount allowed 7,500
Discount received 12,000
Drawings 20,000
Printing and Stationery 6,000
Insurance premium 48,000
Electricity charges 14,000
General expenses 11,000
Bank charges 3,800
Bad debts 12,200
Repairs the Motor vehicle 13,000
Interest on loan 4,400
Provision for Bad-debts 10,000
Loan from Mr. Rajan 60,000
Sundry creditors 62,000
Motor vehicles 1,00,000
Land and Buildings 5,00,000
Office equipment 2,00,000
Furniture and Fixtures 50,000
Stock as on 31.03.2017 3,20,000
Sundry debtors 2,80,000
Cash at Bank 22,000
Cash in Hand 16,000
Total 30,73,400 30,73,400

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.41

Prepare Trading and Profit and Loss Account for the year ended 31.03.2018 and the Balance Sheet
as at that date after making provision for the following:
(a) Depreciate Building by 5%, Furniture and Fixtures by 10%, Office Equipment by 15% and
Motor Car by 20%.
(b) Value of stock at the close of the year was ` 4,10,000.
(c) One month rent for godown is outstanding.
(d) Interest on loan from Rajan is payable @ 10% per annum. This loan was taken on 01.07.2017
(e) Reserve for bad debts is to be maintained at 5% of Sundry debtors.
(f) Insurance premium includes ` 42,000 paid towards proprietor's life insurance policy and the
balance of the insurance charges cover the period from 0104.2017 to 30.06.2018. (May 2018)

6. Following is a Trial Balance of Vijay Traders. You are required to prepare Trading Account and
Profit & Loss Account for the year ended 31st March, 2018 and Balance Sheet as on that date

Trial Balance as on 31st March, 2018

Debit Balance Amt (`) Credit Balance Amt (`)

Rent, Rates & Taxes 3,500 R.D.D. 2,500

Insurance 1,000 Loan from Prakash 34,7000
Wages 6,000 Sales 92,300
Repairs 9,400 Capital 45,000
Drawings 3,000 Sundry Creditors 18,000
Sundry Debtors 15,000 Sundry Income 7,500
Purchases 40,000 Bills Payable 17,000
Discount 900 Discount Received 3,000
General Expenses 3,600
Furniture 40,000
Plant & Machinery 50,000
Stock (1.4.2017) 12,000
Bank 7,500
Bad Debts 600
Bills Receivable 27,500
2,20,000 2,20,000
Adjustment:
1) Prepaid Insurance ` 400
2) Create 10% R.D.D. on Sundry Debtors and 6% discount on Debtors.
3) Outstanding expenses : General Expenses `1,400 and Wages ` 1,000
4) Depreciate Furniture by 10% and Plant & Machinery by 4%
5) Sundry Income of ` 1,500 received in advance.
6) Stock on 31st March 2018, amounted to `30,000.

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.42

7. Following particulars are extracted from the books of Mr. Sandeep for the year ended 31st
December, 2018.
Particulars Amount Particulars Amount
Debit Balances: ` Credit Balances: `

Cash in hand 1,500 Capital 16,000

Purchase 12,000 Bank overdraft 2,000
Sales return 1,000 Sales 9,000
Salaries 2,500 Purchase return 2,000
Tax and Insurance 500 Provision for Bad debts 1,000
Bad debts 500 Creditors 2,000
Debtors 5,000 Commission 500
Investments 4,000 Bills payable 2,500
Opening stock 1,400
Drawings 2,000
Furniture 1,600
Bills receivables 3,000
35,000 35,000
Other information:
i. Closing stock was valued at ` 4,500
ii. Salary of ` 100 and Tax of ` 200 are outstanding whereas insurance ` 50 is prepaid.
iii. Commission received in advance is `100.
iv. Interest accrued on investment is ` 210
v. Interest on overdraft is unpaid ` 300
vi. Reserve for bad debts is to be kept at ` 1,000
vii. Depreciation on furniture is to be charged @10%
You are required to prepare the final accounts after making above adjustments. (May 2019)

8. The balance sheet of Mittal on 1st January, 2018 was as follows: insert table
Liabilities Amount Assets Amounts
` `
Trade payables 16,00,000 Plant & Machinery 31,00,000
Expenses payable 2,50,000 Furniture & Fixture 4,00,000
Capital 51,00,000 Trade receivables 14,50,000
Cash at bank 7,00,000
Inventories 13,00,000
69,50,000 69,50,000

During 2018, his profit and loss account revealed a net profit of ` 15,10,000. This was after
allowing for the following :

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.43

(i) Interest on capital @ 6% p.a.

(ii) Depreciation on plant and machinery @ 10% and on Furniture and Fixtures @5%.
(iii) A provision for Doubtful debts @ 5% of the trade receivables as at 31st December 2018.
But while preparing the profit and loss account he had forgotten to provide for
(1) Outstanding expenses totalling ` 1,85,000 and (2) prepaid insurance to the extent of
` 25,000.
His current assets and liabilities on 31st December, 2018 were: Trade receivables
` 21,00,000; Cash at bank ` 5,20,000 and Trade payables 13,84,000. During the year he
withdrew ` 6,20,000 for domestic use. Closing inventories is equal to net trade
receivables at the year-end.
You are required Draw up revised Profit and Loss account and Balance Sheet at the end of
the year. (Nov 2019)
9. The following is the trial balance of Hari as at 31st December, 2017:
Dr. Cr.
` `
Hari’s Capital Account - 76,690
Stock 1st January, 2017 46,800 -
Sales - 3,89,600
Returns inward 8,600 -
Purchases 3,21,700 -
Returns outward - 5,800
Carriage inwards 19,600 -
Rent & taxes 4,700 -
Salaries & wages 9,300 -
Sundry debtors 24,000 -
Sundry creditors - 14,800
Bank loan @ 14% p.a. - 20,000
Bank interest 1,100 -
Printing and stationary expenses 14,400 -
Bank balance 8,000 -
Discount earned - 4,440
Furniture & fittings 5,000 -
Discount allowed 1,800 -
General expenses 11,450 -
Insurance 1,300 -
Postage & telegram expenses 2,330 -
Cash balance 380 -
Travelling expenses 870 -
Drawings 30,000
5,11,330 5,11,330

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.44

The following adjustments are to be made:

(1) Included amongst the debtors is ` 3,000 due from Ram and included among the creditors
` 1,000 due to him.
(2) Provision for bad and doubtful debts be created at 5% and for discount @ 2% on sundry
debtors.
(3) Depreciation on furniture & fittings @ 10% shall be written off.
(4) Personal purchases of Hari amounting to ` 600 had been recorded in the purchases
daybook.
(5) Interest on bank loan shall be provided for to whole year.
(6) A quarter of the amount of printing and stationary expenses is to be carried forward to
the next year.
(7) Credit purchase invoice amounting to `400 had been omitted from the books.
(8) Stock on 31.12.2017 was `78,600.
Prepare (i) Trading &profit and loss account for the year ended 31.12.2017 and (ii) Balance
sheet as on 31st December,2017. (RTP Nov 2018)

10. The following are the balances as at 31st March, 2017 extracted from the books of Mr. XYZ.
` `
Plant and Machinery 19,550 Bad debts recovered 450
Furniture and Fittings 10,250 Salaries 22,550
Bank Overdraft 80,000 Salaries payable 2,450
Capital Account 65,000 Prepaid rent 300
Drawings 8,000 Rent 4,300
Purchases 1,60,000 Carriage inward 1,125
Opening Stock 32,250 Carriage outward 1,350
Wages 12,165 Sales 2,15,300
Provision for doubtful debts 3,200 Advertisement Expenses 3,350
Provision for Discount on Printing and Stationery 1,250
debtors 1,375 Cash in hand 1,450
Sundry Debtors 1,20,000 Cash at bank 3,125
Sundry Creditors 47,500 Office Expenses 10,160
Bad debts 1,100 Interest paid on loan 3,000

Additional Information:
1. Purchases include sales return of ` 2,575 and sales include purchases return of ` 1,725.
2. Goods withdrawn by Mr. XYZ for own consumption ` 3,500 included in purchases.

Preparation of Final
Accounts of Sole Proprietors
CA Foundation Principles and Practice of Accounting 7.45

3. Wages paid in the month of April for installation of plant and machinery amounting to
` 450 were included in wages account.
4. Free samples distributed for publicity costing ` 825.
5. Create a provision for doubtful debts @ 5% and provision for discount on debtors @ 2.5%.
6. Depreciation is to be provided on plant and machinery @ 15% p.a. and on furniture and
fittings @ 10%p.a.
7. Bank overdraft is secured against hypothecation of stock. Bank overdraft outstanding as
on 31.3.2017 has been considered as 80% of real value of stock (deducting 20% as margin)
and after adjusting the marginal value 80% of the same has been allowed to draw as an
overdraft.
Prepare a Trading and Profit and Loss Account for the year ended 31st March, 2017, and a
Balance Sheet as on that date. Also show the rectification entries. (RTP May 2018)

Preparation of Final
Accounts of Sole Proprietors