12th BOOK KEEPING

Preparation of Final Accounts - 3

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Illustration : 3

The Trial Balance as on 31st March 2004 shows Sundry debtors as Rs.12,000 and bad debts as Rs.300.

No adjustment given.

Illustration : 4

The Trial Balance as on 31st March 2004 shows the following:

Dr. Cr.

Sundry Debtors 40,800 ––

Bad debts written off 1,400 ––

Adjustment: Write off Rs.800/- as bad debts.

Note:

In the above example, Trial Balance shows Rs.1,400 as Bad debts. This means the double entry in respect of Rs.1,400 i.e.debiting Bad debts and crediting Sundry debtors is already completed. Hence Rs.1,400 found in the Trial Balance will not affect the sundry debtors of Rs.40,800.

But for the adjustment given outside the Trial Balance, the adjustment has to be done after the preparation of Trial Balance and this would result in increasing bad debts by Rs.800 and decreasing debtors by Rs.800.

Preparation of Final Accounts - 2

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Illustration : 2

Pass necessary adjusting entries for the following adjustments:

1. Interest charged on drawings Rs.5,000

2. Interest on loan outstanding Rs.3,000

3. Depreciation at 10% is to be charged on Machinery Rs.3,00,000.

4. Write off bad debts Rs.2,000

5. To provide provision for Bad & doubtful debts at 2% on Sundry debtors Rs.60,000

6. To provide Provision for discount on creditors at 2% on Sundry Creditors worth Rs.1,00,000

Preparation of Final Accounts 1

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

2.2 Preparation of Final Accounts

Illustration : 1
Pass necessary adjustment entries for the following adjustments:
1. Salaries outstanding Rs.20,000
2. Prepaid Insurance Rs.400
3. Interest accrued on investments Rs.1000
4. Commission received in advance Rs.2,000
5. To provide 10% interest on capital of Rs.5,00,000
6. Closing Stock Rs.4,00,000

FORMAT - BALANCE SHEET

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Balance Sheet of ............. as on 31st March, .............

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital	XXX		Sundry debtors	XXX
Add: Net Profit	XXX		Less: Bad debts
(or)			written off	XXX
Less: Net Loss	XXX	XXX		XXX
			Less: Proision for Bad &
Less: Drawings	XXX		doubtful debts	XXX
Interest on drawings	XXX	XXX		XXX
			Less: Provision for
			discount on debtors	XXX	XXX
			Land and Buildings	XXX
			Less: Depreciation	XXX	XXX
			Plant & Machinery	XXX
			Less: Depreciation	XXX	XXX
			Furniture	XXX
			Less: Depreciation	XXX	XXX
			Goodwill	XXX
			Less: Written off	XXX	XXX
			Cash in Hand		XXX
			Cash at Bank		XXX
			Closing stock		XXX
			Prepaid expenses		XXX
			Accrued Commission		XXX
		XXX			XXX

FORMAT - PROFIT AND LOSS ACCOUNT

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Profit and Loss account
Dr.					Cr.
Particulars	Rs	Rs	Particulars	Rs	Rs
To Salaries	xxx		By Gross Profit b/d		xxx
Add: Outstanding Salaries	xxx	xxx	(Transferred from
Insurance premium	xxx		Trading A/c)
Less: Prepaid Insurance			By Commission received	xxx
Premium	xxx	xxx	Add: Commission
To Interest on Capital		xxx	accrued but not yet
To Interest on loan	xxx		received	xxx
Add: Interest on loan			By Rent received	xxx
outstanding	xxx	xxx	Less: Rent received in
To Depreciation on:			advance	xxx	xxx
Fixed Assets,			By Interest on drawings		xxx
Buildings, Machinery			By Discount received		xxx
Furniture etc.	xxx	xxx	By New provision for
To Bad Debts	xxx		discount on creditors	xxx
Add: New Bad Debts	xxx		(given in adjustment)
(given in adjustment)			Less: Old provision	xxx	xxx
	xxx
Add: New Provision for
bad & doubtful debts	xxx
(given in adjustment)
	xxx
Less: Old Provision	xxx	xxx
To Discount allowed	xxx
To New Provision for
discount on debtors	xxx
(given in adjustment)
	xxx
Less: Old Provision	xxx	xxx
To Net profit
A	xxx
B	xxx	xxx
(Transferred to
Capital A/c - in profit
sharing ratio)
		xxx			xxx

FORMAT - TRADING ACCOUNT

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Trading Account of (Name)............ for the year ending 31st March, .........
Dr.					Cr.
Particulars	Rs	Rs	Particulars	Rs	Rs
To Opening stock			By Sales	xxx
To Purchases	xxx		Less: Sales returns	xxx	xxx
Less: Purchases returns	xxx	xxx
To Wages	xxx		By Closing Stock		xxx
Add: Outstanding wages	xxx	xxx
To Factory rent
Less: Prepaid Factory rent
To Gross Profit c/d
(Transferred to Profit &
Loss A/c)
		xxx			xxx

FINAL ACCOUNT Adjustment 4

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Sr.No.	Type of Adjustment	Adjustment Entry	How dealt with in
			Trading or Profit and Loss A/c	Balance Sheet

14	Provision for Discount	Provision for Discount	Credit side of Profit and Loss A/c	Liabilities side by
	on Creditors	on Creditors A/c Dr		way of deduction
		To Profit and Loss A/c		from Sundry
				Creditors.

FINAL ACCOUNT - Adjustment 3

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Sr.No.	Type of Adjustment	Adjustment Entry	How dealt with in
			Trading or Profit and Loss A/c	Balance Sheet
			Trading or Profit and Loss A/c	Balance Sheet
12	Provision for Bad and Doubtful Debts	Profit and Loss A/c Dr	i. If the provision for bad and	Assets side by
		To Provision for Bad	doubtful debts is given outside	way of deducting
		and doubtful debts A/c	the Trial balance, then it is shown	New Provision
			on the debit side of Profit and loss	alone from
			Loss account.	Sundry debtors
			ii. If provision for bad and doubtful
			debts is given in the Trial Balance
			(Old) and also in the adjustment
			(New):
			Add new provision for bad and
			doubtful debts with bad debts
			written off.
			a) If the old provision for bad and
			doubtful debts is less than the
			above total, then the difference
			will be shown on the debit side of
			the Profit and Loss account.
			b) If the old provision for bad and
			doubtful debts is more than the
			above total, then the difference
			should be shown on the credit
			side of the Profit and Loss acount
13	Provision for Discount on Debtors	Profit and Loss A/c Dr	Debit side of Profit and Loss A/c	Assets side by
		To Provision for discount	(Amount of provision for discount	way of deduction
		on debtors A/c	is ascertained on good debtors)	from Sundry
				debtors (after
				deduction of bad
				debts and new
				provision for bad
				and doubtful debts

FINAL ACCOUNT- Adjustment 2

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Sr.No.	Type of Adjustment	Adjustment Entry	How dealt with in
			Trading or Profit and Loss A/c	Balance Sheet
			Trading or Profit and Loss A/c	Balance Sheet
6	Interest on Capital	Interest on Capital A/c Dr	Debit side of Profit and Loss A/c	Liabilities side by
		To Capital A/c		by way of
				addition to the
				Capital
7	Interest on Drawings	Capital A/c Dr	Credit side of the Profit and Loss	Liabilities side by
		To Interest on Drawing		way of addition to
				the drawings
				which are
				u l t i m a t e l y
				deducted from
				the Capital.
8	Interest on Loan (Interest on Bank)	Interest A/c Dr	Debit side of Profit and Loss A/c	Liabilities side
		To Interest Outstanding A/c	by way of addition to the	by way of
		Example:	appropriate interest A/c	addition to the
		Interest on Bank Loan A/c		particular loan
		To Interest Outstanding A/c		A/c
9	Interest on Investments	Accrued Interest	Credit side of Profit and Loss A/c	Assets side by
		on investments A/c Dr	by way of addition to the	way of addition
		To Interest received A/c	appropriate interest A/c.	to the particular
				investment A/c
10	Depreciation on Fixed Assets	Depreciation A/c Dr	Debit side of Profit and Loss A/c.	Assets side by
		To Fixed Asset A/c		way of deduction
		Example:		from the
		Depreciation A/c Dr		concerned asset
		To Machinery A/c		account.
11	Bad debts	Bad debts A/c Dr	Debit side of Profit and Loss A/c	Assets side by
		To Sundry debtors A/c		way of deduction
				from
				Sundry debtors

FINAL ACCOUNT : - Adjustment

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

FINAL ACCOUNT - Adjustment Entry 1

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Sl.No.	Type of Adjustment	Adjustment Entry	How dealt with in
			Trading or Profit and Loss A/c	Balance Sheet

1	Closing stock	Closing Stock A/c Dr	Credit side of the Trading A/c	Assets side.
		To Trading A/c

2	Outstanding Expenses: (Wages, Rent, Salaries etc.)	Respective Expenses A/c Dr	i. If the outstanding is an item chargeable to Trading A/c, add the outstanding expenses with relevant expenses in the debit side of the Trading A/c.	Liabilities side.
		To Respective outstanding expenses A/c
		Example:	ii. If it is an item chargeable to Profit and Loss A/c, add the outstanding expenses to the relevant expenses in the debit side of the Profit and Loss A/c.
		Wages A/c Dr.
		To Wages outstanding A/c
		Salaries A/c Dr
		To Salaries outstanding A/c
3	Prepaid Expenses: (Insurance Premium)	Respective prepaid Expenses A/c Dr	Debit side of Trading & Profit and	Assets side.
		To Respective Expenses A/c	Loss A/c by way of deduction from
			respective expenses A/c.
		Example:
		Prepaid Insurance Premium A/c Dr
		To Insurance Premium A/c
4	Accrued Income (Commission)	Accrued Income A/c Dr	Credit side of Profit and Loss A/c by	Assets side
		To Respective Income A/c	way of addition to respective Income
		Example:	A/c.
		Accrued Commission A/c
		To Commission A/c
5	Income received in advance (Rent)	Respective Income A/c Dr	Credit side of Profit and Loss A/c by way of deduction from the respective income A/c.	Liabilities side
		To Respective Income received in advance A/c
		Example:
		Rent received A/c Dr
		To Rent received in advance A/c

FINAL ACCOUNT - Bad Debts

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

1.1.11 Bad Debts
Debts which cannot be recovered are called bad debts. It is a loss for the business.
Example: The trial balance as on 31st March 2004 shows, Sundry
debtors Rs.52,500. Adjustment: Write off Rs. 2,500 as bad debts.

Bad debts will be shown
i) on the debit side of Profit and Loss account and
ii) on the assets side of the Balance Sheet by way of deduction from sundry debtors.

Lesson to be Continued

FINAL ACCOUNT - Provision for Discount on Debtors & Creditors

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

1.1.13 Provision for Discount on Debtors
To motivate the debtors to make prompt payments, cash discount may be allowed to them. After providing provision for bad and doubtful debts, the remaining debtors are called as good debtors. They may pay their dues in time and avail themselves of the cash discount permissable. So a provision for discount on good debtors at a certain percentage may have to be created.
Example: The Trial Balance as on 31st March 2004 shows the following:
Sundry debtors Rs. 45,000
Adjustment: Create 2% provision for discount on Debtors.

Example: The trial balance shows on 31.03.2004,
Sundry debtors Rs. 85,000
Adjustments: Bad debts written off Rs. 5,000. Provide @ 5% provision for bad and doubtful debts and @ 2% provision for discount on debtors.

Provision for discount on debtors will be shown
i) on the debit side of Profit and Loss account and
ii) on the asset side of the Balance sheet by way of deduction from Sundry debtors (after deducting bad debts written off and provision for bad and doubtful debts).

1.1.14 Provision for Discount on Creditors
Similar to cash discount allowed to debtors, the firm may have a chance to receive the cash discount from the creditors for prompt payment. Provision for discount on Creditors is calculated at a certain percentage on Sundry Creditors.
Example: The Trial balance for the year ended 31st March, 2004 shows

Sundry Creditors Rs.50,000.
Adjustment:
Create a provision for discount on creditors @ 2%.

Provision for discount on creditors will be shown
i) on the credit side of Profit and Loss account and
ii) on the liabilities side of the Balance sheet by way of deduction from Sundry creditors.

FINAL ACCOUNT - Provision for Bad and Doubtful Debts

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

1.1.12 Provision for Bad and Doubtful Debts

Every business suffers a percentage of bad debts over and above the debts definitely known as irrecoverable and written off as Bad (Bad debts written off). If Sundry debtors figure is to be shown correctly in the Balance sheet provision for bad and doubtful debts must be adjusted.This Provision for bad and doubtful debts is generally provided at a certain percentage on Debtors, based on past experience.
While preparing final accounts, the bad debts written off given in adjustment is first deducted from the Sundry debtors then on the balance amount (Sundry debtors – Bad debt written off) provision for bad and
doubtful debts calculated.

Example: The trial balance shows on 31.3.2004, Sundry Debtors as Rs.60,000.
Adjustment: Provide 5% provision for bad & doubtful debts on Sundry debtors.

Provision for bad and doubtful debts will be shown
i) on the debit side of Profit and Loss Account and
ii) on the assets side of the Balance sheet by way of deduction from Sundry debtors (after Bad debts written off if any).

Example : The Trial Balance as on 31st March 2004 shows the following:

Sundry Debtors Rs. 81,200
Adjustment: Write off Rs.1,200 as bad debts. Create a provision for Bad and doubtful debts @ 5% on Sundry Debtors.

FINAL ACCOUNT : Interest on loan, Investment & Depreciation

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12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

1.1.8 Interest on Loan (Outstanding)
Borrowings from banks, financial institutions and outsiders for business are called loans. Amount payable towards interest on loan is an expense for the business.

Example: The trial balance (31.3.2004) shows the following:
Bank loan @ 10% on 1.4.03 Rs. 4,00,000
Interest paid Rs. 14,000
Adjustment: Provide for interest on bank loan outstanding.

Interest on loan outstanding will be shown
i) on the debit side of the Profit and Loss account by way of addition to the appropriate interest account and
ii) on the liability side of the Balance sheet by way of addition to the particular loan account.

1.1.9 Interest on Investment:
Interest receivable on investments is an income for the business.
Example: The Trial Balance (31.03.04) shows the following:
Investments @10% Rs. 5,00,000
Interest received on investments Rs. 40,000
Adjustment:
Provide for accrued interest on investments Rs.10,000.

Accrued interest on investments (outstanding interest receivable) will be shown
i) On the credit side of the Profit and Loss account by way of addition to the appropriate interest account and
ii) On the assets side of the balance sheet by way of addition to the investments account.

1.1.10 Depreciation
Depreciation is the reduction in the value of fixed assets due to its use or obsolescence. Generally depreciation is charged at some percentage on the value of fixed asset.
Example: The Trial balance shows the value of furniture on 31.3.2004 as Rs.60,000. Adjustment: Furniture is to be depreciated at 10%.

To bring depreciation into Profit and Loss account the following transfer entry is required.

Depreciation will be shown
i) on the debit side of Profit and Loss account and
ii) on the assets side of the Balance Sheet by way of deduction from the value of concerned asset.