Final accounts 2

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Final accounts 2

  1. 1. 7 Reporting and Preparing Financial Statements
  2. 2. CLASSIFICATION OF CAPITAL AND REVENUE <ul><li>The Going Concern Assumption allows the accountant to classify the expenditure and receipts as: </li></ul><ul><li>Capital Expenditure </li></ul><ul><li>Revenue Expenditure </li></ul><ul><li>Deferred Revenue Expenditure </li></ul><ul><li>Capital Receipts </li></ul><ul><li>Revenue Receipts. </li></ul>
  3. 3. CAPITAL EXPENDITURE : is that expenditure which yields benefits which extend beyond the current accounting period. They are of non-recurring nature. For e.g. cost of land and building, plant and machinery, furniture and fixtures etc. <ul><li>REVENUE EXPENDITURE: is that expenditure which is incurred for the running productivity or earning capacity of a business. Such expenditure yields benefit in the current accounting period only. For e.g. Office and Administration Expenses, Selling & Distribution Expenses etc. </li></ul>
  4. 4. DEFERRED REVENUE EXPENDITURE : is that expenditure for which payment has been made or a liability incurred but is carried forward on the presumption that it will be benefit over a subsequent period or periods. Sometimes, revenue expenditure incurred during the year is very large and it is expected to benefit not only the current year operations but also subsequent period or periods. Such expenditure should be normally written off over a period of 3 to 5 years. For e.g. heavy Advertising Campaign, Research & Development Expenditure.
  5. 5. CAPITAL RECEIPTS AND REVENUE RECEIPTS The recurring receipts are normally the outcome of normal trading activities and are regarded as Revenue Receipts . Foe e.g. sale price received from sale of goods, interest on investments made in past etc. The benefits of recurring receipts do not extend beyond the current accounting period. The Revenue Receipts are shown in the Income Statement. The non-recurring receipts are Capital Receipts and may take form of raising of long-term loans, capital contribution by the owner, sale price of fixed asset etc. The benefits of non-recurring receipts may or may not be confined to current accounting period. The capital receipts create a liability of an equal amount to be paid in future.
  6. 6. <ul><li>RATIONALE OF MAKING ADJUSTMENTS </li></ul><ul><li>The important considerations are: </li></ul><ul><li>Revenue Recognition Principle which requires that revenue should be recognised in the period in which the sale is deemed to have occurred. </li></ul><ul><li>Matching Principle which requires that the expenses should be recognised in the same period as associated revenues. Expenses recognition is tied to revenue recognition. Let the expenses follow the revenue. </li></ul><ul><li>An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. </li></ul>
  7. 7. <ul><li>CLOSING STOCK: </li></ul>Shown on the asset side as Current Asset Balance Sheet Shown on the credit side Trading A/c Closing Stock Dr. To Trading A/c Adjusting Entry
  8. 8. 2. OUTSTANDING EXPENSES: Expenses incurred but not paid at the end of the year are called outstanding expenses Shown on the Liability side as Current Liability Balance Sheet Added to the respective expense on the debit side. Profit & Loss A/c Added to the respective expense on the debit side. Trading A/c Respective Expense A/c Dr. To Outstanding Expense A/c Adjusting Entry
  9. 9. 3.PREPAID EXPENSES: Prepaid Expenses refer to amount paid in the current accounting year for services to be received in the next accounting year Shown on the Asset side as Current Asset Balance Sheet Deducted from the respective expense on the debit side. Profit & Loss A/c Deducted from the respective expense on the debit side. Trading A/c Prepaid Expense A/c Dr. To Respective Expense A/c Adjusting Entry
  10. 10. 4. ACCRUED INCOME (Income earned but not received) : If income for the current year is not received during the year, it is termed as accrued income. Shown on the Asset side as Current Asset Balance Sheet Added to the respective Income on the credit side . Profit & Loss A/c Accrued Income A/c Dr. To Respective Income A/c Adjusting Entry
  11. 11. 5. UNEARNED INCOME (Income received in advance): It refers to income received for the current year against which services are to be provided in the next accounting year Shown on the Liabilities side as Current Liability. Balance Sheet Deducted from the respective Income on the credit side. Profit & Loss A/c Respective Income A/c Dr. To Unearned Income A/c Adjusting Entry
  12. 12. 6. DEPRECIATION on FIXED ASSET: Depreciation is the depreciable cost of a fixed asset allocated to a particular accounting year. Shown on the Asset side by way of deduction from the value of the concerned fixed asset. Balance Sheet Shown on the debit side as separate item. Profit & Loss A/c Depreciation A/c Dr. To Asset A/c Adjusting Entry
  13. 13. 7. BAD DEBTS: When a business enterprise becomes certain about non-recovery of the amount from debtors, it is treated as Bad Debts and charged to Profit & Loss A/c Shown on the Assets side as deduction from the amount of Sundry Debtors. Balance Sheet Shown on the debit side by way of addition to Bad Debts Profit & Loss A/c Bad Debts A/c Dr. To Assets A/c Adjusting Entry
  14. 14. Illustration 2: Trial Balance of M/s Pandit Bros. as at 31 st March,2007 was as follows: <ul><li>Adjustments: </li></ul><ul><li>Rent of building for one month was paid in advance </li></ul><ul><li>Closing Stock as on March 31, 2007 amounted to Rs.10,000/- </li></ul><ul><li>Wages Outstanding amounted to Rs.500/- </li></ul><ul><li>Salaries included Rs.5,000/- paid in advance to an employee </li></ul><ul><li>Furniture to be depreciated @ 10%. </li></ul><ul><li>Debtors included bad debts Rs.2,500/- </li></ul><ul><li>Prepare Trading and Profit and loss A/c and Balance Sheet </li></ul>1,62,000 1,62,000 22,000 1,25,000 15,000 Capital Sales Creditors 1,000 5,000 8,000 25,000 15,000 13,000 15,500 4,500 75,000 Cash Bank Wages Salaries Furniture Rent of Building Debtors Bad Debts Purchases Rs. Rs.
  15. 15. 8. PROVISION FOR BAD AND DOUBTFUL DEBTS: As the exact amount of bad debts cannot be calculated at the time of sale, a provision for bad and doubtful debts may be created in the year of sale and charged to P&L A/c of this year. Shown on the Assets side by way of deduction from the amount of Sundry Debtors (net of additional bad debts) Balance Sheet Shown on the debit side as separate item Profit & Loss A/c Profit & Loss A/c Dr. To Provision for Bad Debts A/c Adjusting Entry
  16. 16. 9. PROVISION FOR DISCOUNT ON DEBTORS: Provision for discount on debtors is created to take care of discount to be allowed to debtors for prompt payment. But before calculating provision for discount, provision for doubtful debts is deducted from debtors. Shown on the Assets side by way of deduction from the amount of Sundry Debtors (net of additional bad debts & Provision for Bad and Doubtful Debts) Balance Sheet Shown on the debit side as separate item Profit & Loss A/c Profit & Loss A/c Dr. To Provision for Discount on Debtors Adjusting Entry
  17. 17. 10. PROVISION FOR DISCOUNT ON CREDITORS: Although Provision for discount on creditors is against the principle of conservatism but it is an accepted accounting practice Shown on the Liabilities side by way of deduction from the amount of Sundry Creditors Balance Sheet Shown on the CREDIT side as separate item Profit & Loss A/c Provision for Discount on Creditors A/c Dr. To Profit & Loss A/c Adjusting Entry
  18. 18. 11.INTEREST ON CAPITAL: To calculate true profit for the year, interest on capital invested by the owner of business is provided in the books and treated as business expense. Shown on the Liabilities side by way of addition to the capital. Balance Sheet Shown on the DEBIT side as separate item Profit & Loss A/c Interest on Capital A/c Dr. To Capital A/c Adjusting Entry
  19. 19. 12.INTEREST ON DRAWINGS: Cash, goods or any other asset withdrawn by the owner for his personal use is termed as drawings. Sometimes interest on drawings is calculated by the business enterprise and treated as business income. Shown on the Liabilities side by way of deduction from the capital. Balance Sheet Shown on the CREDIT side as separate item Profit & Loss A/c Capital A/c Dr. To Interest on Drawings A/c Adjusting Entry
  20. 20. 13.MANAGER’S COMMISSION ON PROFIT: (i) Commission on Profits Before Charging Such Commission: Profit before Commission X Rate of Commission 100 (ii) Commission on Profits After Charging Such Commission: Profit before Commission X Rate of Commission 100 + Rate Shown on the Liabilities side as Current Liability. Balance Sheet Shown on the CREDIT side as separate item Profit & Loss A/c Manager’s Commission Dr. To Outstanding Commission A/c Adjusting Entry
  21. 21. 14. ABNORMAL LOSS OF STOCK: Sometimes loss of goods takes place due to fire, theft, earthquakes, etc. The amount due from the insurance company is shown on the asset side as a Current Asset. Balance Sheet Total value of irrecovered loss of stock is shown on the debit side as separate item. Profit & Loss A/c Total value of abnormal loss of stock (whether or not recovered) is shown on the credit side of the Trading A/c Trading A/c
  22. 22. 15. GOODS SENT ON SALE OR APPROVAL BASIS : Generally, goods supplied on approval are recorded as sales. But this cannot be treated as sales until the express or implied consent of the buyer is obtained. Shown on the Assets side by way of deduction from the Debtors. (with sale price) Shown on the Assets side by way of addition to the Closing Stock. (with cost price) Balance Sheet Shown as a deduction from Sales (with sale price) Added to the Closing Stock on credit side. Trading A/c Sales A/c Dr. To Debtors A/c (with sale price of goods sold on approval basis) Stock A/c Dr. To Trading A/c (with cost of goods sold on approval basis) Adjusting Entry
  23. 23. Illustration 3 : From the following Trial Balance of Mr. Ram, prepare a Trading and Profit and Loss A/c for the year ending on 31 st March, 2006 and a Balance Sheet as on that date: Dr. Trial Balance Cr. 41,000 52,000 4,80,000 5,600 5,500 2,500 3,700 Capital Creditors Sales Bills Payable Purchase Return Provision for Bad Debts Discount Received 51,000 2,600 48,000 12,000 45,000 400 6,500 1,50,000 14,000 2,13,500 7,200 9,300 6,000 6,000 Plant & Machinery Office Furniture Stock (1.4.2005) Motor Van Debtors Cash in Hand Cash at Bank Wages (factory) Wages (office) Purchases Bills Receivable Sales Return Drawings Rent Rs. Rs.
  24. 24. Illustration 3 contd……………………….. <ul><li>The following adjustments are to be made: </li></ul><ul><li>Stock on 31 st March,2006 was valued at Rs.52,000/- </li></ul><ul><li>Rent due but not paid Rs.2,000/- </li></ul><ul><li>Lightning due but not paid Rs.300/- </li></ul><ul><li>Insurance Paid in advance Rs.100/- </li></ul><ul><li>Depreciate Plant & Machinery @ 331/3%; Office Furniture @ 10%; Motor Van @ 331/3% </li></ul><ul><li>The Provision for Bad Debts has to be increased to Rs.3,000/- </li></ul><ul><li>The Provision for Discount on Debtors and Discount on Creditors is to be made @ 2.5% </li></ul><ul><li>(G.P. Rs.1,16,700/-; N.P. Rs.57,890/-; B/S Total Rs.1,51,490/-) </li></ul>5,90,300 5,90,300 800 1,350 300 6,350 1,000 2,500 6,500 Lightning Telephone Insurance Advertisement General Expenses Bad Debts Discount Allowed
  25. 25. Illustration 4: From the following information prepare Final Accounts: Trial Balance as on 31 st March,2006 2,13,000 2,13,000 1,60,000 37,550 450 15,000 Sales Capital Commission Creditors 1,49,600 10,450 4,200 200 20,625 925 2,000 17,000 3,000 5,000 Purchases (Adjusted) Wages Rent of Building Insurance and rates (including premium of Rs.150 p.a. paid up to 30-9-2006) Stock (31-3-2006) Cash Loose Tools Plant Debtors Sundry Expenses
  26. 26. Illustration 4 contd…………………. Adjustments: 1. Loose Tools were valued at Rs.1,600/- on 31-3-2006 2. Depreciate Plant by 10% 3. Manager is entitled to a commission of 10% of net profits after charging such commission. 4. One-third of the building was occupied by the employees who reside in the business building. Treat the value of the perquisite as wages. 5. Wages include Rs.500/- for installation of a plant on 1-10-2005. 6. Loss of stock by fire on 20-3-2006 amounted to Rs.10,000/- and 100% claim was admitted by the Insurance Company. (G.P. Rs.9,050/-; N.L. Rs.575/-; B/S Total Rs.51,975/-)
  27. 27. Illustration 5: The following is the Trial Balance extracted from the books of Akhilesh as on 30 th September, 2007: 2,54,075 2,54,075 1,00,000 ---- ---- 1,27,000 750 ---- 800 25,000 ---- ---- ---- 525 ---- ---- ---- ---- 78,000 2,000 60,000 1,000 30,000 425 45,000 7,550 10,000 1,200 ---- 10,000 2,000 6,900 Capital A/c Plant and Machinery Furniture Purchases and Sales Returns Opening Stock Discount Sundry Debtors / Creditors Salaries Manufacturing Wages Carriage Outwards Provision for Doubtful Debts Rent, rates and Taxes Advertisements Cash Cr. (Rs.) Dr. (Rs.) Particulars
  28. 28. <ul><li>Prepare Trading & Profit and Loss A/c for the year ended on 30 th September,2007 and a Balance Sheet as on that date after taking into account the following adjustments: </li></ul><ul><li>Closing Stock was Valued at Rs.34,220/- </li></ul><ul><li>Provision for Doubtful Debts is to be kept at Rs.500/- </li></ul><ul><li>Depreciate Plant & Machinery @ 10% </li></ul><ul><li>The proprietor has taken goods worth Rs.5,000/- for personal use and additionally distributed goods worth Rs.1,000/- as samples. </li></ul><ul><li>Purchase of furniture Rs.920/- has been passed through Purchases Book. </li></ul><ul><li>(G.P. Rs.67,890; N.P. Rs.38,740/-, B/S Total Rs.1,58,740/-) </li></ul>

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