SUBJECT: ACCOUNTING FOR MANAGEMENT/PPA [UNIT 4 FINAL AACOUNT] SUBJECT: ACCOUNTING FOR MANAGEMENT/PPA [UNIT 4 FINAL AACOUNT] CLASS: FYBBA (GEN)/ FYBBA (HM/TTM)
CLASS: FYBBA (GEN)/ FYBBA (HM/TTM)
When a person starts a business he wishes to know the financial performance of his business. A convenient and When a person starts a business he wishes to know the financial performance of his business. A convenient and universally accepted method of knowing this is to
universally accepted method of knowing this is to ascertain the profit or loss at yearly intervals (1st April to 31stascertain the profit or loss at yearly intervals (1st April to 31st March) and the financial position of the business on a given date. e can ascertain these by preparing the !inal March) and the financial position of the business on a given date. e can ascertain these by preparing the !inal Accounts" which is prepared on the basis of the #rial $alance. #he preparation of !inal Accounts is the last step Accounts" which is prepared on the basis of the #rial $alance. #he preparation of !inal Accounts is the last step in the accounting cycle and
in the accounting cycle and that is why they are called !inal Accounts.that is why they are called !inal Accounts. !inal Accounts include the preparation of
!inal Accounts include the preparation of i) #rading and
i) #rading and
ii) %rofit and &oss Account ' and ii) %rofit and &oss Account ' and iii) $alance sheet.
iii) $alance sheet.
!inal accounts are the means of conveying the profitability and financial position to management" owners and !inal accounts are the means of conveying the profitability and financial position to management" owners and interested outsiders of the business. !inal accounts have to be prepared every year" to make a continuous interested outsiders of the business. !inal accounts have to be prepared every year" to make a continuous assessment of the business for a completed period. t must be kept in mind that epenses and incomes for the assessment of the business for a completed period. t must be kept in mind that epenses and incomes for the ffuulll l aaccccoouunnttiinng g ppeerriiood d aarre e tto o bbe e ttaakkeen n iinntto o aaccccoouunntt.. *uppose" the firm closes its books on 31st March and rent for the month of March has not been paid" this *uppose" the firm closes its books on 31st March and rent for the month of March has not been paid" this epense (rent) has been incurred and yet to be paid. #herefore" it would be proper to include the rent for the epense (rent) has been incurred and yet to be paid. #herefore" it would be proper to include the rent for the month (March) along with the rent of the year to know the true profit. n a firm there will be a number of items" month (March) along with the rent of the year to know the true profit. n a firm there will be a number of items" both epenses and incomes" which have to be ad+usted. f such items are not ad+usted" the final accounts will not both epenses and incomes" which have to be ad+usted. f such items are not ad+usted" the final accounts will not reveal the true and fair picture of the business performance. All such items which need to be brought into books reveal the true and fair picture of the business performance. All such items which need to be brought into books of account at the time of p
of account at the time of preparing final accounts are called ,ad+ustments-.reparing final accounts are called ,ad+ustments-.
ournal entries passed to effect the re/uired ad+ustments are known as ad+usting entries. ournal entries passed to effect the re/uired ad+ustments are known as ad+usting entries. 1.1 Adjustments
1.1 Adjustments
*ome important and common items" which need
*ome important and common items" which need to be ad+usted at the time of to be ad+usted at the time of preparing the final accounts arepreparing the final accounts are discussed below. discussed below. 1. 0losing stock 1. 0losing stock . 2utstanding epenses . 2utstanding epenses 3. %repaid penses 3. %repaid penses 4. Accrued incomes 4. Accrued incomes
5. ncomes received in advance 5. ncomes received in advance 6. nterest on capital 6. nterest on capital 7. nterest on drawings 7. nterest on drawings 8. nterest on loan 8. nterest on loan 9. nterest on investment 9. nterest on investment 1:. ;epreciation 1:. ;epreciation 11. $ad ;ebts 11. $ad ;ebts
1. %rovision for bad and doubtful debts 1. %rovision for bad and doubtful debts 13. %rovision for discount on debtors 13. %rovision for discount on debtors 14. %rovision for discount on creditors. 14. %rovision for discount on creditors. <ote = A
1.1.1 Closing Stock
#he unsold goods in stock at the end of the accounting period is called as closing stock. #his is to be valued at cost or market price whichever is lower.
Examp!:
#he value of closing stock shown outside the trial balance on 31.3.::4 is >s.1"::":::. ?alue of closing stock will appear
i) on the credit side of trading account and ii) on the assets side of balance sheet. 1.1.2 Outstanding Expenses
penses which have been incurred but not yet paid during the accounting period for which the final accounts are being prepared are called as outstanding epenses.
ample= #rial balance shows salaries paid >s.":::. Ad+ustment= *alary for March ::4" >s."::: not yet paid. Outstanding expenses will be shown
i) on the debit side of %rofit and &oss account by way of additions to the particular epenses and ii) on the liabilities side of the $alance *heet.
"#"#$ P%!pa&' Exp!!
penses which have been paid in advance are called as prepaid (unepired) epenses.
ample= #rial $alance for the period ending 31st March" ::4 shows >s.15"::: as insurance premium. Ad+ustment= %repaid nsurance premium >s.7"5::.
%repaid epenses will be shown
i) on the debit side of the %rofit and &oss account by way of deduction from the particular epenses and ii) on the assets side of the $alance *heet.
"#"#4 A**%+!' I*,m! ,% O+--a'&. I*,m!
ncome which has been earned but not received during the accounting period is called as accrued income. Example: 0redit side of #rial $alance (31.3.::4) shows commission received >s.8":::. Ad+ustment=
0ommission accrued but not yet received >s.":::. Accrued income will be shown
i) on the credit side of %rofit and &oss account by way of addition to particular income and ii) on the assets side of the $alance *heet
"#"# I*,m! R!*!&0!' & A'0a*!
ncome received during a particular accounting period for the work to be done in future period is called as income received in advance.
Example: #rial $alance for the period ending 31st March" ::4 shows >en t received >s.5":::. Ad+ustment= >ent received in advance >s.5":::.
ncomes received in advance will be shown
i) on the credit side of the %rofit and &oss account by way of deducting from the particular income and ii) on the liabilities side of the $alance sheet.
"#"#1 I-!%!- , Cap&-a
n order to see whether the business is really earning profit or not" it is desirable to charge interest on capital at a certain rate.
Example: As per #rial $alance" capital as on 31.3.::4 is >s.4"::":::. Ad+ustment= %rovide 6@ interest on capital.
#o bring interest on capital to %rofit and &oss account" the following transfer entry is re/uired. nterest on capital will be shown
i) on the debit side of %rofit and &oss account and
ii) on the liabilities side of the $alance *heet by way of addition to the capital. "#"#2 I-!%!- , 3%a&.
Amount withdrawn by the owner for his personal use is called as drawings. When interest on capital is allowed" then interest on drawings is charged from the owner. nterest on drawings is an income for the business and will reduce the capital of the owner.
ample= #he trial balance shows the following= >s. 0apital as on 31.3.::4 4"::"::: ;rawings as on 31.3.::4 3:"::: Ad+ustment = 0harge interest on drawings 5@. nterest on drawings will be shown
i) on the credit side of %rofit and &oss account and
ii) on the liabilities side of the $alance *heet by way of addition to the drawings which are ultimately deducted from the capital.
FORMAT OF TRA3ING ACCOUNT
Pa%-&*+a% R Pa%-&*+a% R
#o 2pening stock $y *ales
#o %urchases &ess= *ales returns
&ess= %urchases returns
#oWages $y 0losing*tock
Add= 2utstanding wages
#o 0arriage nward
#o Bross %rofit cCd (#ransferred to %rofit D &oss ACc)
%rofit and &oss account
;r. 0r.
Pa%-&*+a% R R Pa%-&*+a% R R
#o *alaries $y Bross %rofit bCd
Add= 2utstanding *alaries (#ransferred from
nsurance premium #rading ACc)
&ess= %repaid nsurance $y 0ommission received
%remium Add= 0ommission
#o nterest on 0apital accrued but not yet
#o nterest on loan received
Add= nterest on loan $y >ent received
outstanding &ess= >ent received in
#o;epreciationon= advance
!ied Assets" $y nterest on drawings
$uildings" Machinery $y ;iscount received
!urniture etc. $y <ew provision for
T, Ba' 3!5- (,') discount on creditors
Add: Bad Debts(New) (given in ad+ustment)
(given in adjustment) &ess= 2ld provision
Add: New Provision or
bad ! doubtul debts"BD# (New) (given in adjustment)
$ess: Old Provision"BD#(old)
%o Dis&ount allowed
%o New Provision or
discount on debtors (given in ad+ustment) &ess= 2ld %rovision #o <et profit A $ (#ransferred to
0apital ACc E in profit sharing ratio)
6# " !rom the following balances etracted from the books of *h. Byan on 3st ;ecember" 1993" prepare a #rading Account" % D & ACc and a $alance *heet.
Pa%-&*+a% 3!5&-R# C%!'&-R# 0apital ousehold penses *ales >eturn inwards >eturn outwards %urchases 0ash at *hopk $ank 2verdraft nterest on 2verdraft 0reditors
*tock at the 0ommencement !reight
>ent and #aes ;ebtors
0ommission !reehold %roperty *undry penses *alaries and wages &ife nsurance %remium nsurance %remium Motor ?ehicle #ypewriter nterest 0arriage inwards 0arriage outwards %ower Audit !ee &ighting 1:"::: 4"::: 1"5:"::: 1"6:: 1"5:: 18"::: 8"5:: 7"::: 3"6:: 3"::: 3:"::: 3"9:: :"::: 1"8:: 1"6:: 39"8:: 8"::: "::: 8:: ":: 1"7:: "::: 1"8":: 1"8:"::: 6"::: 15"::: 17"8:: ":: 8:: #2#A& 3"5:"::: 3"5:":::
0losing *tock valued on that date was >s. 15":::.
%>2$&M =F%,m -7! 8,,&. T%&a Baa*! ,8 G+%'!!p S&.7 a a- $"- 3!*!m5!%9 ;;29 p%!pa%!
T%a'&. a' P%,8&- a' L, A**,+- a' Baa*! S7!!-:
;r.$alances >s. 0r.$alances >s.
2pening *tock &and and $uilding Machinery !urniture D !itures %urchases *alaries Beneral penses >ent
%ostage and #elegrams *tationery Wages !reight on %urchases 15"5:: 35"::: 5:"::: 5"::: 1":6"::: 11"::: "5:: 3"::: 1"4:: 1"3:: 6"::: "8:: 0apital
&oan from Mrs. Burdeep *ingh 9@ *undry 0reditors %urchase >eturns *ales ;iscount 6:"::: 3:"::: 9"6:: "1:: ":7"3:: 1"::
>epairs *undry ;ebtors $ad ;ebts 0ash in and 0ash at $ank *ales >eturns 4"5:: 3:"::: 6:: 1:: 6"4:: 5"1:: 3"1:":: 3"1:"::
#he following further information was given=
1) Wages for ;ecember" ::7 amounting to >s. "1:: have not yet been paid.
) ncluded in Beneral penses is nsurance %remium >s. 6::" paid for the year ending 31st march" ::8.
3) A provision for doubtful debts 5@ on debtors is necessary.
4) ;epreciation is to be charged as follows= &and and $uilding @" Machinery 1:@ and !urniture and !itures 15@.
5) #he loan from Mrs. Burdeep *ingh was taken on 1st uly" ::7. nterest has not been paid yet.
6) #he value of stock on hand on 31st ;ec" ::7 was >s. 14"9::.
P%,5!m $: T7! 8,,&. & -7! T%&a Baa*! ,8 M%# G<a , $;-7 J+!9 ;;2:
Baa*! R# R#
0ash in and 0ash at bank %urchases Account *ales Account
>eturns nward Account >eturns 2utward Account Wages Account
!uel D %ower Account 0arriage on *ales Account 0arriage on %urchase Account *tock Account (1st uly" ::7)
$uilding Account
!reehold &and Account Machinery Account %atent Account *alaries Account Beneral ps. Account nsurance Account ;rawings Account 0apital Account
*undry ;ebtors Account *undry 0reditors Account
54: "63: 4:"675 68: 1:"48: 4"73: 3":: ":4: 5"76: 3:"::: 1:"::: :"::: 7"5:: 15"::: 3"::: 6:: 5"45 14"5:: 98"78: 5:: 71"::: 6"3:: TOTAL "9219=; "9219=;
#aking into account the following ad+ustments" %repare #rading Account and %rofit and &oss Account and the $alance *heet=
(a) *tock on hand on 3:th une" ::7 is >s. 6"8::.
(b) Machinery is to be depreciated at the rate of 1:@ and patents at the rate of :@. (c) *alaries for the month of une ::7 amounting to >s. 1"5:: were unpaid.
(d) nsurance includes a premium of >s. 17: on a policy epiring on 31st ;ecember ::7.
(e) Wages include a sum of >s. "::: spent on the erection of a cycle shed for employees and customers. (f) A provision for $ad and ;oubtful ;ebts is to be created to the etent of 5 per cent on *undry ;ebtors. 4# T7! 8,,&. -%&a 5aa*! & !x-%a*-!' 8%,m -7! 5,,> ,8 a m!%*7a- , $"- 3!*!m5!% ;;2:
PARTICULARS 3R# R# C%#R#
!urniture and !ittings Motor ?ehicles
$uildings
0apital Account $ad ;ebts
%rovision for $ad ;ebts *undry ;ebtors and 0reditors *tock on anuary 1" ::7 %urchases and *ales $ank 2verdraft
*ales and %urchases >eturns Advertising
nterest Account 0ommission 0ash
#aes and nsurance Beneral penses *alaries 64: 6"5: 7"5:: 15 3"8:: 3"46: 5"475 :: 45: 118 65: 1"5: 78 3"3:: 1"5:: :: "5:: 15"45: "85: 15 375 34"::: 34"::: T7! 8,,&. a'?+-m!- a%! -, 5! ma'!:
(a) *tock in and on 31st ;ecember" ::7 was >s. 3"5:.
(b) ;epreciate $uilding 5@" !urniture and !itting 1:@ and Motor ?ehicle :@. (c) >s. 85 is due for interest on bank 2verdraft.
(d) *alaries >s. 3:: and #aes >s. 1: are outstanding. (e) nsurance amounting to >s. 1:: is prepaid.
(f) 2neEthird of the commission received is in respect of work to be done net year.
(g) Write off further >s. 1:: as $ad ;ebts and %rovision for $ad ;ebts is to be made e/ual to 5@ on *undry ;ebtors.
%repare a #rading and %rofit and &oss Account for the year ending 31st ;ecember" ::7 and a $alance *heet as
on that date.
6# !rom the following #rial $alance prepared from the books of Burdeep on 31st ;ecember ::7" prepare
#rading and %rofit and &oss Account for the year ending 31st ;ecember" ::7 and $alance *heet as on that date=
Pa%-&*+a% R# P# Pa%-&*+a% R# P#
BurdeepFs drawings $ills >eceivable %lant and Machinery
*undry debtors (ncluding Mr. Byan for dishonoured che/ueG>s. 1":::)
Wages (Manufacturing) >eturns inward
%urchases >ent and #aes
*tock on 1st an" ::7 *alaries #ravelling epenses nsurance 0ash $ank
>epairs and renewals nterest of &oan nterest and discount $ad debts
!itures and !ittings
1:"55: 9"5:: 8"8:: 6"::: 4:"97: "78: "56"59: 5"6: 89"68: 11"::: 1"88: 4:: 53: 18"97: 3"37: 1"::: 4"87: 3"6: 8"97: BurdeepFs 0apital &oan at 6@ p.a. *ales 0ommission received *undry 0reditors 1"19"4:: :"::: 3"56"43: 5"64: 59"63: 91"9";; 91"9";;
#he following ad+ustments are to be made=
(a) *tockEinEtrade in hand on ;ecember 31" ::7 >s. 1"8"96:. (b) Write off half of ByanFs che/ue.
(c) 0reate a provision of 5@ on sundry debtors.
(d) Manufacturing wages include >s. 1":: for erection of new machinery purchased.
(e) ;epreciate plant and machinery by 5@ p.a. !or fitures and fittings by 1:@ per annum. (f) 0ommission not earned but received amounts to >s. 6::.
6# 1 O $"- 3!*!m5!%9 ;;2 -7! 8,,&. T%a& Baa*! a !x-%a*-!' 8%,m -7! 5,,> ,8 M%# H#
Pa%-&*+a% R# Pa%-&*+a% R# 3%# Baa*! ;rawings *undry ;ebtors nterest on &oan 0ash in and *tock on 1st an" ::7 Motor ?ehicles 3"::: :"1:: 3:: ":5: 6"839 1:":::
>ates #aes and nsurance Advertising Beneral penses $ills >eceivable C%# Baa*!: 0apital *undry 0reditors "891 3"64 3"489 6"88 8"::: 1:"4:1
0ash at $ank &and D $uildings $ad ;ebts %urchases *ales >eturns 0arriage 2utward 0arriage nward *alaries 3"555 1"::: 55 66"458 7"81 "4:4 "99 9":97 &oan on Mortgage $ad ;ebts >eserve *ales %urchases >eturns ;iscounts $ills %ayable >ent >eceived 9"5:: 71: 1"1:"43 1"346 54: "614 5:
%repare #rading and %rofit and &oss Account for the year ended 31st ;ecember" ::7 and $alance *heet as on
that date" after making ad+ustments for the following matters=
1. ;epreciate &and and $uilding at E1C @ and Motor ?ehicles at :@. . nterest on &oan at 6@ p.a. s unpaid for si months.
3. Boods costing >s. 5:: were sent to a customer on sale or return for >s. 6:: on 3:th ;ecember" ::7 and
had been recorded in the books as actual sales.
4. *alaries amounting to >s. 75: and rates amounting to >s. 35: are outstanding. 5. %repaid nsurance amounted to >s. 15:.
6. #he provision for $ad ;ebts is to be maintained at 5@ on *undry ;ebtors.
7. %rovide for managerFs 0ommission at 1:@ on net profits after charging such commission. 8. *tock in hand on 31st ;ecember" ::7 was valued at >s. 6"5:.
6# 2 !rom the following balances etracted from the books of Mr. ardev *ingh" prepare trading and profit and loss account for the year ended 31.3::7 and a balance sheet on that date=
Pa%-&*+a% 3!5&- (R#) Pa%-&*+a% C%!'&- (R#)
%urchases
0omputer at cost (bought on 31.3.::7) 0ash at $ank
0ash in and
!urniture and fittings at cost >ent $ills receivable #rade 0harges *undry debtors ;rawings 71"8: 18"38: 4"::: "836 1"54: 1"54: 6"7: 9: 34"156 5":: 0apital account 0reditors $ills %ayable ;iscount *ales >eturns outwards >ent due 6:"::: 13"::: 1:": "::: 6:"7: 11"43 3:
*alaries >eturns nwards 16"78: 1"::: "92291@ "92291@ A'?+-m!-:
1) *tock at the end at cost >s. 5"6:: (marketEvalue >s. 6"::).
) >s. 6"::: paid to Mrs. >ed against $ills payable were debited by mistake to Mr. BreenFs account and included in the list of sundry debtors.
3) #raveling epenses paid to sales representatives >s. 5"::: for the month of March ::7 were debited to his personal account and included in the list of sundry debtors.
4) ;epreciation on furniture and fittings shall be provided at 1:@ p.a. 5) %rovide for doubtful debts at 5@ on sundry debtors.
6) Boods costing >s. 1"5:: were used by the proprietor.
7) *alaries included >s. 1"::: paid to sales representative who is further entitled to a commission of 5@ on net sales.
8) *tationery charges >s. 1":: due on 31.3.::7.
9) %urchases included opening stock valued at cost >s. 7":::.
10) *ales representative further entitled to an etra commission of 5@ on net profit after charging his etra commission.
