CHAPTER 6 FINAL ACCOUNTS WITH ADJUSTMENTS

Size: px

Start display at page:

Download "CHAPTER 6 FINAL ACCOUNTS WITH ADJUSTMENTS"

Trevor Johnson
5 years ago
Views:

1 CHAPTER 6 FINAL ACCOUNTS WITH ADJUSTMENTS Suppose, the firm closes its books on 31st March and rent for the month of March has not been paid, this expense "rent" has been incurred and yet to be paid. Therefore, it would be proper to include the rent for the month (March) along with the rent of the year to know the true profit. In a firm there will be a number of items, both expenses and incomes, which have to be adjusted. If such items are not adjusted, 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 of account at the time of preparing final accounts are called adjustments. Adjustments Some important and common items which need to be adjusted at the time of preparing the final accounts are discussed below: 1. Closing Stock 2. Outstanding Expenses 3. Prepaid Expenses 4. Accrued Incomes 5. Incomes Received in Advance 6. Depreciation 7. Bad Debts Note: All adjustments are given outside the trial balance. 1. Closing Stock The goods remain unsold at the end of the accounting period is called as closing stock. This is to be valued at cost or market price whichever is lower. Example: The value of closing stock shown outside the trial balance on 31/3/2014 is SR. 100,000. Value of closing stock will appear i) On the credit side of Trading Account ii) On the Assets side of balance sheet. Dr. Trading account for the year ending 31st March, 2014 Cr. By Closing Stock 100,000 Balance Sheet as on 31 st March, 2014 Assets Amount Liabilities Amount Closing Stock 100,000 1

2 2. Outstanding Expenses Expenses which have been incurred but not yet paid during the accounting period for which the final accounts are being prepared are called as outstanding expenses. Example: Trial balance shows salaries paid SR. 22,000. Adjustment: Salary for March 2014, SR. 2,000 not yet paid. Outstanding expenses will be shown i) On the debit side of Trading or Profit and Loss account by way of additions to the particular expenses as the case may be. ii) On the Liabilities side of the Balance Sheet. Dr. Profit & Loss Account for the year ending 31 st March, 2014 Cr. To Salaries 22,000 Add: Outstanding +2,000 24,000 Balance Sheet as on 31 st March, 2014 Assets Amount Liabilities Amount Outstanding Salaries 2, Prepaid Expenses Expenses which have been paid in advance are called as prepaid (unexpired) expenses. Example: Trial Balance for the period ending 31 st March, 2014 shows SR. 15,000 as insurance premium. Adjustment: Prepaid Insurance premium SR. 7,500. Prepaid expenses will be shown i) On the debit side of the Trading or Profit and Loss account by way of deduction from the particular expenses as the case may be. ii) On the Assets side of the Balance Sheet. Dr. Profit & Loss Account for the year ending 31 st March, 2014 Cr. To Insurance premium 15,000 Less: Prepaid - 7,500 7,500 Balance Sheet as on 31 st March, 2014 Assets Amount Liabilities Amount Prepaid Insurance premium 7,500 2

3 4. Accrued incomes Income which has been earned but not received during the accounting period is called as accrued income. Example: Credit side of Trial Balance (31/3/2014) shows commission received SR. 8,000. Adjustment: Commission accrued but not yet received SR. 2,000. Accrued income will be shown i) On the credit side of Profit and Loss account by way of addition to particular income. ii) On the Assets side of the Balance Sheet. Dr. Profit & Loss Account for the year ending 31 st March, 2014 Cr. By Commission Received 8,000 Add: Accrued Commission + 2,000 10,000 Balance Sheet as on 31 st March, 2014 Assets Amount Labilities Amount Accrued Commission 2, Incomes received in advance Income received during a particular accounting period for the work to be done in future period is called as income received in advance. Example: Trial Balance for the period ending 31 st March, 2014 shows Rent received SR. 25,000. Adjustment: Rent received in advance SR. 5,000. Incomes received in advance will be shown: i) On the credit side of the Profit and Loss account by way of deducting from the particular income. ii) On the Liabilities side of the Balance sheet. Dr. Profit & Loss Account for the year ending 31 st March, 2014 Cr. By Rent received 25,000 Less: Rent received in advance - 5,000 20,000 Balance Sheet as on 31 st March, 2014 Assets Amount Liabilities Amount Rent received in advance 5,000 3

4 6. Depreciation Depreciation is the gradual reduction in the value of fixed assets due to its use or "التقادم" obsolescence or any other reasons. Generally depreciation is charged at some percentage on the value of fixed asset. Example: The Trial balance shows the value of furniture on 31/3/2014 as SR. 60,000. Adjustment: Furniture is to be depreciated at 10%. Depreciation will be shown i) On the debit side of Profit and Loss account. ii) On the Assets side of the Balance Sheet by way of deduction from the value of concerned asset. Dr. Profit & Loss Account for the year ending 31 st March, 2014 Cr. To Depreciation on Furniture 6,000 Balance Sheet as on 31 st March, 2014 Assets Amount Labilities Amount Furniture 60,000 Less: Depreciation 10% 6,000 54, 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 2014 shows, Sundry debtors SR. 52,500. Adjustment: Write off SR. 2,500 as bad debts. Bad debts will be shown i) on the debit side of Profit and Loss account. ii) on the Assets side of the Balance Sheet by way of deduction from sundry debtors. Profit & Loss Account for the year ending 31 st March, 2014 Dr. Cr. To Bad debts 2,500 Balance Sheet as on 31 st March, 2014 Assets Amount Labilities Amount Sundry debtors 52,500 Less: Bad debts written off - 2,500 50,000 4

5 Illustration1. From the following trial balance of a trader, make out a Trading and Profit and Loss account and Balance Sheet as on 31 st March, Particulars Amount (Debit) Amount(Credit) Sales Purchases Printing Charges Wages Salaries Opening Stock Carriage Inwards General Expenses Trade Marks Rates and Taxes Capital Discount received Loan Buildings Furniture Machinery Cash Bank 105,000 2,500 77,500 12, ,000 8,800 26,250 5,000 2, ,000 25,000 50,000 1,000 30, , ,800 1, ,000 Adjustments: 1. The closing stock was valued at SR. 320, Outstanding Salaries SR. 10, Prepaid rates & taxes SR Depreciation on and on furniture@ 10%. 771, ,050 5

6 Solution: Trading Account for the year ending 31 st March, , ,000 Profit and Loss Account for the year ending 31st Dec To Printing charges To Salaries 12,500 Add: Outstanding + 324, ,950 Balance Sheet as on 31 st March, 2014 Assets Amount Labilities Amount 626, ,500 6

7 Illustration 2. The following Trial Balance has been extracted from the books of a trader on Trial Balance Particulars Amount (Debit) Amount(Credit) Machinery Cash at Bank Cash in Hand Wages Purchases Stock (01/04/2012) Sundry Debtors Bills Receivable Rent Interest on Bank Loan Commission received General Expenses Salaries Discount received Capital Sales Bank Loan Sundry Creditors Purchase returns Sales returns 40,000 10,000 5,000 10,000 80,000 60,000 40,000 29,000 4, ,000 7,500 4,000 3,000 4,000 90, ,000 40,000 40,000 5,000 Total 302, ,000 Adjustments: 1. Closing Stock SR. 80, Interest on Bank loan not yet paid SR Commission received in advance SR. 1, Write off bad debts SR. 2,000. Prepare Trading and Profit and loss Account for the year ended and Balance Sheet as on that date after giving effect to the above adjustments. 7

8 Solution: Trading and Profit and Loss Account for the year ending 31 st March, 2013 Profit and Loss Account for the year ending 31st Dec ,000 57,000 Balance Sheet as on 31 st March, 2013 Assets Amount Liabilities Amount 8

9 Illustration 3. Prepare Trading and Profit Loss Account for the year ending 31 st December 2010 and Balance Sheet on that date from the following Trial Balance of NADEC Company. Trial Balance Currency - SR Debit Balance Amount Credit Balance Amount Stock 10,000 Sales 60,000 Purchases 33,500 Creditors 4,200 Discount 2,600 Capital 26,000 Wages 13,000 Bills Payable 8,000 Salaries 4,000 Loan 22,000 Travelling expenses 800 Commission 850 Carriage inward 550 Administrative expenses 210 Trade expenses 1,200 Interest 500 Building 10,000 Furniture 400 Debtors 8,500 Cash 4,090 Bank 2,000 Machinery 8,000 Land 20,000 Total 120, ,200 Additional information 1. Stock on 31 st December 2010 SR 17, Wages Outstanding for the year SR Salaries Prepaid for the year SR

10 Solution: Trading Account of NADEC For the year ended 31 st December 2010) Profit and Loss Account of NADEC for the year ended 31 st December Balance Sheet of NADEC As on 31 st December 2010 Assets Amount Liabilities Amount 10

11 Illustration 4. The following is the trial balance of Abdullah at 31 st March2010. Debit Balance Amount (SR ) Credit Balance Amount (SR) Drawings Bank Cash Purchases Sales Returns Inventory at 1 Apr.2009 Carriage inwards Salaries Trade receivables Motor Vehicles Fixtures and fittings Wages Rent Light and heat Telephone and postages Discount allowed 13,600 5, ,300 5,700 8,500 2,400 1,600 15,300 23,100 12,400 6,800 4,100 3,200 1, Capital Loan from S. Abdullah. Sales Revenues Purchase Returns Trade Payables Discount Received 42,140 10,000 88,400 3,100 7, , ,790 Additional information Stock on 31 st March 2010 SR 9,800. Carriage inwards Outstanding for the year SR 300. Rent prepaid for the year SR 400. Depreciate motor vehicles by SR 2,

12 Solution: Trading account of Abdullah For the year ending 31 st March2010) TO Opening Inventory 8,500 By Sales Revenues 88,400 TO Purchase 46,300 Less: S/R 5,700 82,700 Less: P/ R 3,100 43,200 By Closing Inventory 9,800 TO Carriage inwards 2,400 Add: Outstanding 300 2,700 TO Wages TO Light and heat TO Gross Profit c/d 6,800 3,200 28,100 92,500 92,500 Profit and Loss Account for Abdullah the year ending 31 st March2010. TO Salaries TO Rent 4100 Less: Prepaid 400 1,600 3,700 By Gross Profit b/d By Discount received 28, TO Telephone and postages TO Discount allowed TO Depreciation on motor vehicles TO Net Profit( transferred to capital a/c) 1, ,100 19,120 Cash Bank Trade receivables Closing Inventory Fixtures and fittings Motor vehicles 23,100 Less: Depreciation 2,100 Prepaid rent 29,050 29,050 Balance Sheet for Abdullah As on 31 ST Mach2010 Assets Amount Labilities Amount 460 Capital 42,140 5,800 Add: Net Profit 19,120 15,300 61,260 9,800 Less: Drawings 13,600 12,400 47,660 21, Loan from Abdullah Trade Payable Outstanding carriage 10,000 7, ,160 65,160 12

13 Illustration 5: Extract the income statement for the year ended 31 st December2010 for Mohammad and the statement of financial position (Balance Sheet) as at 31 st December 2010 from the following. Trial balance on 31st December 2010 Capital Drawings Cash at bank Buildings Fixtures Trade receivables Trade payables Motor vans Purchases Sales revenues General expenses Salaries Motor expenses Lighting and heating Insurance Rent Name of accounts Dr. (SR) Cr(SR) 66,405 5,258 4,200 30,000 18,750 15,250 2,500 86,452 5,250 13,560 1, , , , ,405 Additional information Inventory on 31 st December 2010 was SR Insurance prepaid for two months SR 79 Rent left unpaid SR 100 Commissioned accrued SR 500 Depreciate building by 10% and fixtures by

14 Solution: Trading account of Mohammad for the year ending 31 st December 2010 TO Purchases TO Lighting and heating TO Gross Profit c/d 86, ,908 By Sales revenue By Closing Inventory 109,250 11, , ,250 Profit and Loss Account for Mohammad for the year ending 31 st December 2010 TO General expenses TO Salaries TO Insurance 550 Less: Prepaid 79 5,250 13, By Gross Profit b/d By Accrued commission 32, TO Rent 380 Add: Unpaid TO Motor expenses TO Depreciation: *Building 3,000 Fixtures 750 1,365 3,750 TO Net Profit (transferred to capital a/c) 8,532 33,408 33,408 Balance Sheet (As on 31 st December 2010) Assets Amount Liabilities Amount Cash at bank Trade receivables Closing inventory 4,200 15,250 11,000 Capital Add : Net Profit 66,405 8,532 74,937 Prepaid Insurance 79 Less: Drawings 5,258 Accrued commission ,679 Motor vans 2,500 Fixtures 18,750 Trade payables 8,750 Less: Depreciation ,000 Building 30,000 Less: Depreciation 3,000 27,000 78,529 Un paid Rent ,529 14

15 Illustration 6.The following is the trial balance of Almarai as on 30 September 2012 Name of accounts Dr. (SR) Cr(SR) Inventory 1October 2011 Purchases Sales revenues Salaries and wages Rent and rates Insurance Motor expenses Printing and stationery Light and heat General expenses Premises Motor vehicles Fixtures and fittings Trade receivables Trade payables Cash at bank Drawings Capital 2,368 12,389 3, ,000 1, , ,200 18,922 1,731 12,636 33,289 33,289 The inventory at 30, September 2012 is valued at SR 2,946. Additional information: 1.Salaries and wages outstanding SR 138 Printing and stationary prepaid SR 16 Bad Debts SR 96 Motor vehicles reduced by 10% Required Prepare an income statement for the year ended 30 September2012 and a statement of Almarai financial position at that date. 15

16 Solution: Trading account of Almarai for the year ending 30 st September 2012 TO Inventory TO Purchases TO Lighting and heating TO Gross Profit c/d 2,368 12, ,945 By Sales revenue By Closing Inventory 18,922 2,946 21,868 21,868 Profit and Loss Account Almarai for the year ending 31 st December 2010 TO General expenses TO Salaries and wages 3,862 Add: Outstanding 138 TO Insurance TO Rent and rates TO Motor expenses TO Printing and stationery 216 Less: Prepaid 16 TO Bad-Debts TO Depreciation: *Motor vehicles 314 4, By Balance (Gross Profit b/d) 6,945 TO Net Profit transferred to capital a/c 909 6,945 6,945 Balance Sheet (As on 30 September 2012) Assets Amount Labilities Amount 482 Capital 12,636 Add : 909 3,800 13,545 Less: Drawings 1,200 Cash at bank Trade receivables 3,896 Less: Bad Debts 96 Closing inventory Prepaid Printing and stationery Motor vehicles 1,800 Less: Depreciation 180 Premises Fixtures and fittings 2, ,620 5, ,214 Trade payables Outstanding Salaries and Wages 12,345 1, ,214 16

17 Illustration 7. On 31 st December2011, the trial balance of Gas Company showed the following accounts and balances: Name of accounts Dr.(SR) Cr(SR) Bank Capital Bank loan Inventory Purchases Sales revenues Rent and rates and insurance Plant and machinery Office furniture and fittings Discount allowed Bank interest Discount received Wages and salaries Light and heat Drawings Return outwards Return inwards Trade Payables Trade receivables , ,000 15,000 70,000 24,000 1, ,000 9,000 10,000 1,000 22,500 75,000 22, ,000 3, , ,000 Additional information The inventory at 31 December 2011 was valued at SR 19,500. Light and heat outstanding SR 1,000. Insurance prepaid SR 500. Discount received in advance SR1,000. Plant and Machinery reduced by 5,000. Accrued income SR 800. Create 10% bad-debts on trade receivable. 287,000 Required: Prepare an income statement for the year ended 31 December2011 and a statement of financial position at that date. 17

18 Solution: Trading of Gas Company account (for the year ending 31 st December 2011) 185, ,500 Profit and Loss Account of Gas Company for the year ending 31 st December ,300 49,300 Balance Sheet (As on 30 September 2012) Assets Amount Liabilities Amount 130, ,550 18

19 Illustration 8.T.king has an accounting year ending on 30 April. The following trial balance was prepared for the year ended 30 April 2012 Name of accounts Dr.(SR) Cr(SR) Capital Drawings Bank overdraft Cash Plant and machinery Sales revenue Purchases Trade receivable Trade payables Provision for bad debts Bad debs Rent Light and heat Stationery Inventories 7,600 1,170 60,000 42,160 15, ,200 3,700 2,430 5,900 59,640 1,540 68,200 12, , ,970 Additional information Plant and machinery is depreciated at 10%. Provision for bad debts should be 5% of trade receivables. There is an unpaid commission amounting to SR 580. Prepaid rent SR 600 Inventory at 30 April 2012 was SR 7220 You are required to prepare the Trading and Profit& Loss account and Balance Sheet. 19

20 Solution: Trading account of King for the year ending 30April ,420 75,420 Profit and Loss Account of King Company for the year ending 31 st December ,660 23,660 Balance Sheet of King As on 30 April 2012 Assets Amount Liabilities Amount 77,430 77,430 20

21 QUESTIONS a) Fill in the blanks: 1. Net Profit is transferred from Profit and loss account to account. 2. Closing stock is valued at Cost Price or price whichever is lower. 3. Outstanding expenses are shown on the side of the balance sheet. 4. Prepaid expenses are shown on the side of the balance sheet. 5. Income accrued but not received will be shown on the side of the Balance sheet. 6. Income received in advance will be shown on the side of the Balance sheet 7. Interest on loan borrowed unpaid is shown on the side of the Balance sheet. 8. Depreciation is deducted from the concerned in the Balance sheet. 9. Debts which are not recoverable from Sundry debtors are termed as. (Answers: 1. Capital, 2. Market, 3. Liabilities, 4. Assets, 5. Assets, 6. Liabilities, 7. Liabilities, 8. Fixed asset, 9. Bad debts). b) Choose the correct answer: 1. Returns inwards are deducted from a) Purchases b) Sales c) Returns outward 2. The Profit and Loss account shows a) Financial position of the concern b) Net profit or Net loss c) Gross profit or Gross Loss 3. Rent outstanding is a) a liability b) an asset c) an income 4. Closing stock is shown in a) Profit and loss account b) Trading account and Balance sheet c) None of the above. 5. Opening stock is shown in a) Balance sheet b) Profit and Loss account c) Trading account 6. Gross Profit is transferred to a) Capital account b) Profit and loss account c) None of the above 7. Outstanding interest on loan borrowed is to be added to 21

22 a) Asset a/c b) Income a/c c) Loan a/c 8. All the items given in the adjustment will appear at in the Final accounts. a) Three places b) Two places c) One Place (Answers: 1. (b); 2. (b); 3. (a); 4. (b); 5. (c); 6. (b); 7. (c); 8. (b)) 22

23 III. Problems: 1.From the under mentioned Trial Balance of Mr. Salem as on , prepare Trading and Profit and Loss Account and Balance sheet as on that date. Trial Balance Debit Balances Amount Credit Balances Amount Cash in Hand 1,500 Capital 80,000 Purchases 1,20,000 Bank 4% 20,000 Opening stock 40,000 Bills payable 25,000 Sundry Debtors 60,000 Sundry Creditors 25,000 Plant and Machinery 50,000 Sales 2,00,000 Furniture 20,000 Provision for bad & Bills Receivable 15,000 doubtful debts 1,500 Rent and Taxes 10,000 Interest 1,000 Wages 16,000 Salaries 20, , ,500 Additional information supplied: i) Closing stock SR. 50,000. ii) Provide for outstanding liabilities. Rent and taxes SR. 2,000. Wages SR. 3,000. Salaries SR. 4,000. iii) Depreciation on Plant and and on furniture@ 10%. iv) Provide 4% interest on Bank loan. v) Write off bad debts SR. 2,000. (Answer: G.P. SR. 71,000; N.P. SR. 30,200; B/s SR. 190,000 23

24 2. From the following Trial Balance of Mr. Aqil, prepare Trading and Profit and Loss Account for the year ended 31st March, 2012 and a Balance Sheet as on that date. Trial Balance Particulars Amount (Debit) Amount(Credit) Capital Sales 40,000 25,000 Purchases Salaries Rent Insurance Drawings Machinery Bank Balance Cash Stock ( ) Debtors 15,000 2,000 1, ,000 28,000 4,500 2,000 5,200 2,500 Creditors 1,000 66,000 66,000 Adjustments required: a) Stock on SR. 4,900 b) Salaries unpaid SR. 300 c) Rent paid in advance SR. 200 d) Insurance prepaid SR. 90 (Answer: G.P. SR.9,700; N.P. SR.5,890; B/s SR.42,190) 24

25 3. The trial balance for Jamal Ahmad at 31 St December2011 is as follows: Name of accounts Debit balance (SR) Credit balance (SR) Sales revenues 10,000 Trade receivable Purchases 5,000 2,000 Trade payables 1,000 Rent Rates Inventories Motor car Bank ,650 5,000 Capital account 9,250 Total 20,250 20,250 Additional information Closing inventory value is SR 500. The rates paid cover the 15 months to 31 st March2012. The motor car is depreciated by 20 %. Required: a. Prepare the income statement (Trading & P/L account) for Jamal Ahmad for the year ended 31 St December2011 b. Prepare the statement of financial position at the same date. Note. Rates=300/15 monthsx12 months=240 25

26 4. The balances extracted from the books of Cara Van at31st December2012 are given below: Name of the Account Dr. Balance Name of the Account Cr Balance Drawing 7,180 Sales revenues 131,040 Heating and lighting 1,234 Trade payable 630 Stationery and postage 268 Purchase returns 747 Electrical Bills 1,446 capital 34,860 insurance 1,818 Discount received 426 Wages 18,910 inventories 42,120 purchases 74,700 Rent and rates 2,990 General expenses 1,460 Plant and machinery 9,060 Cash at bank 3,222 Cash in hand 65 Trade receivables 1,920 Sales return 1,310 Total 167, ,703 Required: Prepare Trading and profit and loss account and Balance Sheet for the year ended 31 st December Additional information: At 31 st December Inventories are valued at SR 33, Rent amounting to SR 310 is still owing; 3. Insurance paid in advance is SR

27 5. On 31 st December2011, the trial balance of Faheem showed the following accounts and balances: Name of accounts Dr.(SR) Cr(SR) Bank Capital Bank loan Inventory Purchases Sales revenues Rent and rates and insurance Plant and machinery Office furniture and fittings Discount allowed Bank interest Discount received Wages and salaries Light and heat Drawings Return outwards Return inwards Trade Payables Trade receivables 250 6,000 54,000 7,500 35,000 12, ,500 4,500 5, ,250 37,500 11,000 83,500 1,500 2,000 8, , ,500 Additional information The inventory at 31 December 2011 was valued at SR Light and heat outstanding SR 500. Insurance prepaid SR 250. Discount received in advance SR500. Plant and Machinery reduced by 2,500. Accrued income SR 400. Create 5% bad-debts on trade receivable. Required: Prepare an income statement for the year ended 31 December2011 and a statement of financial position at that date. 27

28 6. Sufiyan has an accounting year ending on 30 April. The following trial balance was prepared for the year ended 30 April 2012 Name of accounts Dr. (SR) Cr(SR) Capital 119,280 Drawings 15,200 Bank overdraft 3,080 Cash Plant and machinery 2, ,000 Sales revenue 136,400 Purchases Trade receivable 84, Trade payables Provision for bad debts 25,400 1,780 Bad debs Rent Light and heat Stationery Inventories 12,20 8,400 7,400 4,860 11, , ,940 Additional information Plant and machinery is depreciated at 20%. Provision for bad debts should be 10% of trade receivables. There is an unpaid commission amounting to SR 1,160. Prepaid rent SR 1,200 Inventory at 30 April 2012 was SR 14,440 You are required to prepare the Trading and Profit& Loss account and Balance Sheet 28

CHAPTER 6 FINAL ACCOUNTS WITH ADJUSTMENTS

CHAPTER 6 FINAL ACCOUNTS WITH ADJUSTMENTS 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