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FINANCIAL ACCOUNTING

(F.Y. B.A.F.: SEMISTER- 1)

GROUP MEMBERS:
(GROUP NO.:- 2)
Name
SAMIKSHA HADKAR AMRUTA GAYAKVAD SUMMAYA GHADIYALI SNEHA GHAG NIKITA GONDHALEKAR ROSHNI GOTHAL NAMRATA HIRE AKSHADA JADHAV

roll no. 14
09 10 11 12 13 15 16

INVENTORY
WHAT IS INVENTORY?
Till now we have learnt monitory transactions in a business. They include money that has come in, goes out, income, expenses, purchases, sales, etc. all these transactions are related to money. Inventory means stock maintenance. In these a record of rates and quantities of item is maintained. Record of quantity purchased, sold and in stock, etc is maintained in inventory. Inventory accounting includes recording of stock details like the purchase of stock, stock movement between storage locations or godowns and providing information on stock availability.

IMPORTANCE OF STOCK VALUATION


Verification and valuation of inventory is important because of following: 1) To show proper value of assets: The goods lying in stock at the end of the year are assets of business and hence must be shown in the balance sheet. 2) To show proper profits: The income of goods in stock will be received when these goods are sold in future. Hence the cost of closing stock is carried forward to be deducted from such future sales. Thus closing stock is brought into books in order to compute the correct amount of profits in the current year as well in the future.

INVENTORY COSTING METHODS FIFO: (First In First Out)


FIFO is a costing method whereby the goods purchased first are assumed to be the goods sold so that the closing stock consists of most recently purchased goods and at price which is closer to Market Price.

WEIGHTED AVERAGE METHOD


Weighted average cost is a method whereby each quantity to be averaged is assigned a weight and the price are averaged after multiplying them by the weighted quantities. A new weighted average price has to be worked out on each purchase of materials.

Illustration 1:
Calculate by FIFO method of Inventory valuation, the cost of goods sold and value of closing inventory from the following data: Date 01-01-2003 05-02-2003 10-03-2003 15-03-2003 12-04-2003 16-06-2003 25-06-2003 Transaction Opening stock Purchase Purchase Sales Sales Purchase Sales Units 1,500 750 600 1,800 750 600 750 Price per unit 20 25 22 30 31 25 32

Solution:
FIFO (First In First Out) Stores Ledger Account Date 2003 01-01 05-02 10-03 15-03 12-04 16-06 25-06 Units 750 600 600 Purchase Rates Amount 25 18,750 22 25 13,200 15,000 Units 1500 300 450 300 300 450 Issues Rates Amount 20 25 25 22 22 25 30,000 7,500 11,250 6,600 Units 1,500 1,500 750 1,500 750 600 450 600 300 300 600 150 Balance Rates 20 20 25 20 25 22 25 22 22 22 25 25 Amount 30,000 30,000 18,750 30,000 18,750 13,200 11,250 13,200 6,600 6,600 15,000 3,750 3,750

6,600 11,250 Total 46,950 73,200 Cost of goods sold = Opening stock + Purchases Closing stock = 30,000 + 46,950 3,750 = Rs. 73,200. Value of closing inventory is Rs. 3,750.

Illustration 2:
Keep stock record on Weighted Average Method basis from the following transactions. Purchases: March 2004 Date 01 04 09 15 25 31 Units 500 700 900 300 200 500 Rate per Unit 18 20 18 25 20 25

Sales: March 2004 02 07 11 18 27 200 500 400 800 500 22 25 21 28 25

Find out cost of goods sold and then profit.

Solution:
Weighted average (Perpetual Inventory system) Stock Ledger Date 2004 01-03 02-03 04-03 07-03 09-03 11-03 15-03 18-03 25-03 27-03 31-03 Total Units 500 700 900 300 200 500 Purchase Rate 18.00 20.00 18.00 25.00 20.00 25.00 Amount 9,000 14,000 16,200 7,500 4,000 12,500 63,200 Units 200 500 400 800 500 Issues Rate 18.00 19.40 18.50 20.00 20.00 Amount 3,600 9,700 7,400 16,000 10,000 46,700 Balance Units Amount 500 9,000 300 5,400 1,000 19,400 500 9,700 1,400 25,900 1,000 18,500 1,300 26,000 500 10,000 700 14,000 200 4,000 700 16,500 16,500

Working notes: 1) Issue on 07th March is valued as follows: 5,400 + 14,000 = 19,400 = 19.40 300 + 700 1,000 th 2) Issue on 11 March is valued as follows: 9,700 + 16,200 = 25,900 = 18.50 500 + 900 1,400 th 3) Issue 18 March is valued as follows: 18,700 + 7,500 = 26,000 = 20 1,000 + 300 1,300 4) Issue on 07th March is valued as follows: 10,000 + 4,000 = 14,000 = 20 500 + 200 700 Therefore, the value of stock as on 31-3-2004 is 700 units Rs. 16,500. 5) Cost of goods sold = opening stock + purchase closing stock = 63,200 + 16,500 = Rs. 46,700 6) Profit = Sale - cost of goods sold = 60,200 46,700 = Rs. 13,500

Illustration 3:
M/s Desai and Co. a trader of plastic toys had 12000 toys valued at rs.3 per toy. His purchases and sales during first six months ending 31st.december 2003 were as under: On 22nd July 2003 sales 5000 toys @ Rs 20 each On 23rd July 2003 purchased (carriage inward Rs 1000) 10000 toys @ Rs 15 each On 25th October 2003 sales 8000 toys @Rs 24 each On 26th October 2003 purchased (carriage inward Rs 1200) 12000 toys @ Rs 18 each On 31st December 2003 sales 13000 units @ Rs 29 each You are required to Ascertain: Cost of stock on hand as on 31st December 2003 under each of the weighted average method.

Solution:
Weighted Average Method Stock Ledger Date 2003 1 22 23 25 26 31 Total Receipts Units Opening 10,000 12000 Rates 15.10 18.1 Amount 1,51,000 8000 217200 13000 3,68,200 14.68 10.12 Issued Units Rates 5,000 3 Closing balance Units Rates Amount 12,000 3 36,000 15,000 7,000 3 21,000 17,000 10.12 1,72,000 80,960 9,000 10.12 91040 21,000 14.68 3,08,240 190840 1,17,400 2,86,800 1,17,400 Amount

Cost of goods sold = Opening stock + Purchase Closing stock = 36,000 + 3, 68,200 1, 17,400 = Rs. 2, 86,800 Value of closing inventory is Rs. 1, 17,400

Illustration4:
Following are the purchases and sales of wheat in the month of March 2010. Prepare a statement of valuation of stock on the base of weighted average cost method. Date4 2010 March 1 March 4 March 5 March 8 March 10 March 18 March 23 March 26 March 29 March 31 Purchase 600 300 200 20 400 Rates 4 3.80 4.20 4.01 4.40 Sales 300 50 200 400 300

Solution:
Weighted Average Method Date 2010 1-3 4-3 5-3 8-3 10-3 18-3 23-3 26-3 29-3 31-3 Qty. 600 300 200 20 400 Purchase Rate 4 3.80 4.20 4.01 4.40 Amt. 2400 1140 840 80 1760 Qty. 300 50 200 400 300 Sales Rate 4 3.90 3.90 4.01 4.28 Amt. 1200 195 780 1604 1284 Qty. 600 300 600 550 350 550 150 170 570 270 Balance Rate 4 4 3.90 3.90 3.90 4.01 4.01 4.01 4.28 4.28 Amt. 2400 1200 2340 2145 1365 2205 6015 682 2448 1156

Total sales= opening + purchase closing stock = NIL + 6220 1156 = 5064

Final Account
The preparation of final accounts involves preparation of manufacturing account, trading account, profit and loss account, and balance sheet. Before preparing final account the trial balance is required to be prepared. The main books of accounts maintained by the firm are journal inclusive subsidiary books and a ledger books. At the end of the financial period the ledger account are closed, a list of accounts is prepared showing debit and credit balance. The balance should be tally with the each other. The purpose of preparing manufacturing trading and profit and loss accounts is to arrive at profit earned, or the loss sustained during the financial year. These accounts are to be prepared the concept of matching cost with revenues with reference to the time period and business transactions.

Illustration 1:
Following is the Trial balance of Shree Mahamaya as on 31st March, 2008. Particulars Salaries Wages Returns Carriage inward Carriage outward Rent Insurance Stock on 1st April, 1999 Rates & taxes Power & fuel Plant & machinery Furniture Purchases & sales Investments Income from investments Commission Discount Bad debts Cash in bank of Baroda Cash in hand Capital Debtors & creditors Rs. Other Information: 1) Stock on 31st March, 2008 was valued at Rs. 80,000. 2) Outstanding expenses are: Wages Rs. 6,000 ; Power & fuel Rs. 2,000; Salaries Rs. 1,000; Rent Rs. 600. 3) Insurance was paid for the year ended 30th June, 2008. Rates & taxes include Rs. 600 related to the next year. 4) During the year goods costing Rs. 2,000 were distributed as free samples for which no entry was passed. 5) Depreciation is to be provided at 10% p.a. on plant & machinery and on furniture. Machine costing Rs. 40,000 was purchased on 1st January, 2008. You are required to prepare Trading and Profit & loss Account for the year ended 31 st March, 2008. Debit Rs. 11,000 66,000 20,000 24,000 20,000 6,600 4,000 30,000 5,400 16,000 2,00,000 20,000 2,40,000 1,60,000 8,000 4,000 50,000 1,000 1,14,000 Credit Rs. 16,000

4,00,000 30,000 24,000 12,000

4,40,000 78,000

10,00,000 10,00,000

Solution:
Dr. Trading and Profit & loss A/c for the year ended 31st March, 2008 Cr. Particulars Rs. Rs. Particulars Rs. Rs. To opening stock 30,000 By sales 4,00,000 Purchases 2,40,000 Less: returns 20,000 3,80,000 Less: returns 16,000 2,24,000 By free samples 2,000 To wages 66,000 By closing stock 80,000 Add: outstanding 6,000 72,000 To carriage inward 24,000 To power & fuel 16,000 Add: outstanding 2,000 18,000 To Gross Profit c/d 94,000 4,62,000 To salaries Add: outstanding To rent Add: outstanding To rents & taxes Less: prepaid To insurance Less: prepaid To carriage outward To discount To samples To bad debts To depreciation: Machinery Furniture Net Profit 11,000 1,000 6,600 600 5,400 600 4,000 1,000 12,000 7200 4,800 3,000 20,000 8,000 2,000 4,000 17,000 2,000 Rs. 19,000 80,000 1,60,000 Rs. 1,60,000 By Gross Profit b/d By income from investment By commission By discount 4,62,000 94,000 30,000 24,000 12,000

Liabilities Capital Add: Net Profit Sundry creditors Outstanding expenses: wages Power & fuel Salaries Rent

Balance Sheet as on 31ST March, 2008 Rs. Rs. Assets Rs. 4,40,000 Plant & 80,000 5,20,000 machinery: 78,000 Opening balance 1,60,000 Add: additions 40,000 Less: depreciation 17,000 6,000 Furniture: 2,000 Opening balance 20,000 1,000 Less: depreciation 2,000 600 9,600 Investments Closing stock Sundry debtors Bank of Baroda Cash on hand Prepaid expenses: Insurance 1,000 Rates & taxes 600 6,07,600

Rs.

1,83,000 18,000 1,60,000 80,000 1,14,000 50,000 1,000 1,600 6,07,600

Illustration 2:
The trial balance of Rajesh as on 31st December, 2007 was as follows: Debit balances Opening stock: Raw materials Work-in-progress Finished goods Sundry debtors Carriage on purchase Bills receivable Wages Salaries Telephone charges Postage Repairs to plant Repairs to office furniture Purchases Cash at bank Plant & machinery Office furniture Rent Lighting General expenses Rs. 23,000 10,000 15,500 27,000 1,500 18,000 12,000 10,000 500 500 1,200 600 1,00,000 12,000 90,000 9,000 5,000 1,300 1,600 Credit balances Sundry creditors Bills payable Sale of scrap Commission Provision for doubtful debt Capital account: Sales Current account of Rajesh Rs. 17,000 8,500 1,500 350 1,650 1,00,000 2,00,000 9,700

3,38,700 The following additional information is provided to you:

3,38,700

1) Closing stock: Raw materials Rs. 15,800; finished goods Rs. 18,200; Semi finished goods Rs. 7,000. 2) Salaries Rs. 1,000 & wages Rs. 3000 are unpaid for December 2007 3) Machinery & office furniture are to be depreciated by 10% & 5% respectively 4) Provisional for doubtful debt is to be maintained at 10%. 5) Lighting is to be charged to office premises for Rs. 300 and remaining Rs. 1,000 are to be charged to factory. 6) Factory premises occupy 1/4th of total area. You are requested to prepare the Manufacturing Account, Trading Account, Profit & Loss Account and the balance sheet relating to 2007.

Solution:
Particulars To work-inprogress To RMC: Opening stock Add: Purchase Less: closing stock To carriage on purchases To wages Add: unpaid To repairs to plant To rent (1/4) To lighting To depreciation on plant Manufacturing A/c of Rajesh For the year ended 31st December, 2007 Rs. Rs. Particulars 10,000 By work-in-progress By sale of scrap By Trading A/c 23,000 1,00000 1,23,000 15,800 1,07,200 1,500 15,000 1,200 1,250 1,000 9,000 1,46,150 1,46,150 Rs. Rs. 7,000 1,500 1,37,650

12,000 3,000

Trading and Profit & Loss A/c of Rajesh For the year ended 31st December, 2007 Particulars Rs. Rs. Particulars To opening stock of 15,000 By sales F.G. By closing stock of To manufacturing A/c 1,37,650 F.G. To Gross profit c/d 65,050 2,18,200 To salaries 10,000 By Gross Profit b/d Add: Unpaid 1,000 11,000 By commission To telephone charges 500 To postage 500 To repairs to office furniture 600 To rent 3,750 To lighting 300 To general expenses 1,600 To bad debt Add: NRDD 2,700 Less: ORDD 1,650 1,050 To depreciation on furniture 450 To Net Profit 45,650 65,400

Rs.

Rs. 2,00,000 18,200 2,18,200 65,050 350

65,400

Liabilities Sundry creditors Bills payable Outstanding expenses: Salaries Wages Current A/c of Rajesh Add: Profit Capital A/c

Balance Sheet of Rajesh As on 31st December, 2007 Rs. Rs. Assets 17,000 Fixed assets: 8,500 Plant & machinery Less: depreciation Office furniture 1,000 Less: depreciation 3,000 4,000 Current assets: Cash at bank 9,700 Sundry debtors: 45,650 55,350 Less: new RDD 1,00,000 Bills receivable Stocks : Raw materials Work-in-progress Finished goods

Rs. 90,000 9,000 9,000 450 27,000 2,700

Rs. 81,000 8,550 12,000 24,700 18,000 15,800 7,000 18,200 1,84,850

1,84,850 Note: Net profit should be added to Current Account.

Illustration 3:
Following trial balance was extracted by Mr. Gaurav Choksi from his books of accounts for the year ended 31st March, 2008. You are required to prepare his final account for the year ended on that date. Trial balance as on 31st March, 2008 Debit Balance Raw material: Opening stock purchases Work-in-progress (op. stock) Finished goods (op. stock) Plant & machinery Building Factory taxes Patents Furniture Drawings Wages Advertisement Salary to factory staff Salary to office staff Sales return Bank charges Motive power Factory insurance Discount Bad debts Office rent Insurance & taxes Miscellaneous expenses Carriage inward Stationary & printing Bills receivable Sundry debtors Bank of India Cash on hand Rs. 1,20,000 1,95,000 60,000 2,10,000 3,60,000 1,50,000 3,600 30,000 36,000 21,000 73,500 1,800 9,600 10,800 5,100 300 9,000 4,500 2,400 2,100 10,800 6,900 3,300 1,500 4,200 12,900 63,000 1,03,000 4,100 Credit Balance Capital Provision for doubtful debts Bills payable Sundry creditors Sales Purchase return Discount Rs. 7,50,000 9,000 15,000 36,600 6,90,000 12,000 1,800

Rs.

15,14,400

Rs. 15,14,400

Adjustments: 1) Value of closing stock in physical possession: a) Raw material Rs. 90,000 b) Finished goods Rs. 1,95,000 c) Work-in-progress Rs. 24,000 2) Factory insurance prepaid Rs. 900 3) Provide interest on capital @ 5%. Interest on drawing is to be ignored. 4) Create 5% provision for doubtful debts, 2% discount on sundry debtors and 3% on sundry creditors. 5) Goods costing Rs. 5,400 were sold on credit on 27th March, 2000 but these goods were dispatched actually on 8th April, 2008. 6) A two months bill for RS. 6,000 endorsed to creditors was dishonored on 30 th March, 2008 but was not passed through the books. Solution: Mr. Gaurav Choksi Dr. Particulars To WIP (opening) To RMC: Opening Add: purchase Less: returns Less: closing stock To Carriage inward To wages To salary to factory staff To motive power To factory taxes To factory insurance Less: prepaid Rs. 1,20,000 1,95,000 12,000 90,000 Manufacturing A/c Rs. Particulars 60,000 By trading A/c Closing stock of WIP Rs. Cr. Rs. 3,49,800 24,400

2,13,000 1,500 73,500 9,600 9,000 3,600 3,600 3,73,800 3,73,800

4,500 900

Trading and Profit & loss A/c for the year ended 31-3-2008 Particulars To opening stock To manufacturing A/c Gross profit To advertisement To salary To bank charges To discount To office rent To insurance & taxes To misc. expenses To printing To interest on capital To discount on debtors To net profit Rs. Rs. Particulars 2,10,000 By sales Less: returns 3,49,800 Closing stock 3,14,700 Less: goods sold but not adjusted 8,74,500 1,800 By gross profit 10,800 By Discount 300 By discount on 2,400 creditors 10,800 To doubtful debt 6,900 3,300 4,200 37,500 1,197 2,41,851 3,21,048 Balance Sheet as on 31-3-2008 liabilities Capital Less: drawings Add: interest on capital Add: Net profit Sundry creditors Add: endorsed bill dishonored Less: discount Bills payable Rs. 7,50,000 21,000 37,500 2,41,851 36,600 6,000 1,098 Rs. Assets Building Plant & machinery Patents Furniture Closing stock: Raw material Finished goods WIP Sundry debtors Add: bill dishonored Less: NRDD Less: discount Bank of India Cash in hand Bills receivable Prepaid factory insurance Rs. Rs. 1,50,000 3,60,000 30,000 36,000 3,21,048 Rs. Rs. 6,90,000 5,100 1,95,000 5,400 1,89,600 8,74,500 3,14,700 1,800 1,098 3,450

10,08,351

41,502 15,000

90,000 1,83,600 24,000 63,000 6,000 3,450 1,197

30,3600

64,350 1,03,000 4,100 12,900 900 10,64,853

10,64,853

Illustration 4:
From the given trial balance of J.K. Manufacturers prepare Manufacturing, Trading and Profit & Loss Account and balance sheet for the year ended 31-12-2008. Particulars Capital Drawings Purchase of raw materials Bills receivable Cash/bank Plant Buildings Sales Sales return Purchase return Carriage inward Opening stock: Raw material WIP Finished goods Wages Investments (interest 5% p.a.) Loan to Lalu Bad debts Rent Factory lighting Salary Interest on investment Advertisement Discount received Debtors Creditors Bills payable Rs. Adjustments: 1) Closing stock at the end was Raw material Rs. 10,000; WIP Rs.3,500 and finished goods Rs. 80,000. 2) Depreciate plant by 5% and building by 10%. 3) Bills payable dishonored Rs. 1,000 but no entry was made in the books of accounts. 4) Mr. John is a debtor and a creditor. He shows his debit balance of Rs. 2,000 and a credit balance of Rs. 5,000. 5) Finished goods destroyed by fire Rs. 7,000. Insurance company admits a claim of Rs. 5,000. Rs. 1,800 1,00,000 14,000 6,890 12,500 23,000 1,100 1,100 6,000 10,000 4,000 8,860 10,000 3,000 450 1,380 350 4,750 2,850 35,310 Rs. 45,000

1,50,000 1,500

350 3,870 39,200 7,420 2,47,340

2,47,340

Solution:
In the books of J.K. Manufacturers Dr. Manufacturing account for the year ended 31-12-2008 Rs. 6,000 1,00,000 1,500 10,000 Rs. Particulars By WIP (closing) By manufacturing cost Rs. Rs. 3,500 1,11,935 Cr.

Particulars To RMC: Opening stock (+) purchase (-) purchase return (-) closing stock To WIP (opening) To carriage inward To wages To factory lighting To depreciation on plant

94,500 10,000 1,100 8,860 350 625 1,15,435 1,15,435 Cr.

Dr.

Trading and Profit & Loss account for the year ended31-12-2008 Rs. Rs. 4,000 1,11,935 1,19,965 2,35,900 4,750 450 1,380 2,850 2,300 2,000 1,10,605 1,24,335 Particulars By sales (-) returns By goods lost by fire By closing stock By gross profit By interest on investment (+) accrued By discount Rs. 1,50,000 1,100 Rs.

Particulars To opening stock To manufacturing cost To gross profit To salary To bad debt To rent To advertisement To depreciation on building To loss by fire To net profit

1,48,900 7,000 80,000 2,35,900 1,19,965

350 150

500 3,870

1,24,335

Balance sheet as on 31-12-2008 Liabilities Capital (-) drawings (+) net profit Creditors (+) bill dishonored (-) set off Bills payable (-) dishonored Rs. 45,000 1,800 1,10,605 39,200 1,000 2,000 7,420 1,000 Rs. 1,53,805 38,200 6,420 Assets Bills receivable Cash at bank Plant (-) depreciation Buildings (-) depreciation Investments Interest due on above loan Debtors (-) set off Closing stock Raw material WIP Finished goods Insurance claim Rs. 12,500 625 23,000 2,300 Rs. 14,000 6,890 11,875 20,700 10,000 150 3,000 33,310

35,310 2,000 10,000 3,500 80,000

1,98,425

93,500 5,000 1,98,425

Accounting with Incomplete Record


A small businessman who writes his own accounts may not be familiar with the system of double entry book keeping or the complex accounting principles of entry, matching of costs and revenue, difference between capital and revenue and so on. Hence the records of small businessmen may not both be complete and accurate. There may be only a partial record of some important transactions such as cash, amount payable and amount receivable. Such accounting is also known as single entry system. Eric Kohler has defined single entry system as a system of book keeping in which as a rule only records of cash and of personal accounts are maintained. It is always incomplete double entry. the incompleteness varying under different circumstances. Single entry system is not based on recognized accounting principles. It does not record both aspects of all the transactions. Even a small traders keeping such incomplete records needs to know the financial performance and position of his business. i.e; the profits earned and the value of assets and liabilities. Two methods are involved in used to prepare final accounts from the information available in incomplete records: 1- Statement of affairs method. 2- Conversion method. It is adopted by a small trader or firm.

Illustration 1:
Mr. Sukumar a trader did not keep his books of accounts properly. He furnished the following data from his rough diary stated that the gross profit margin is 25% on sales. Particulars Debtors Stock Plant and machinery Furniture and fittings creditors Rough cash book disclosed the following: Particulars Payments: Due to bank 1-1-2004 Creditors General expenses Wages Drawings Receipts: Collection from debtors Loans from friends Rs. 9,250 31,250 12,500 19,375 3,750 75,000 6,250 1st January, 04 Rs. 1, 10,000 23,750 25,000 1,750 24,375 31stDecember,04 Rs. 1, 26,000 ? 25,000 1,750 48,750

Prepare trading and Profit and Loss A/c for the year ended 31-12-2004 and balance sheet at 3112-2004after providing the depreciation on assets at 10% and a provision of 3,750 on doubtful debts. It was also ascertained that payments to creditors include Rs. 6,250 as advance to a contractor for new premises.

Solution:
Mr. Sukumar Dr. Trading and Profit & Loss A/c for the year ended 31st December 2004 Rs. Particulars 23,750 By sales (WN 1) 49,375 By closing stock (Bal. fig.) 19,375 22,750 1,15,250 To general expenses To depreciation on - Plant 2,500 - Furniture 175 To reserve for doubtful debts To net profit c/d 12,500 By gross profit b/d 2,675 3,750 3,825 22,750 Balance Sheet as on 31st December 2004 Liabilities Capital (WN4) Add: Net profit Less: Drawings Creditors Loan from friends Rs. 1,26,875 3,825 1,30,700 3,750 Assets Plant & machinery Less: depreciation Furniture 1,26,950 Less: depreciation 48,750 Advance to contractor 6,250 Closing stock Debtors Less: R.D.D. BANK (WN 3) 1,81,950 Rs. Rs. 25,000 2,500 1,750 175 1,26,000 3,750 Rs. 22,500 1,575 6,250 24,250 1,22,250 5,125 1,81,950 22,750 Cr.

Particulars To opening stock To purchase (WN 2) To wages To gross profit/d (25% on sale)

Rs. 91,000 24,250

1,15,250 22,750

Working notes: 1) Ascertaining sales: Dr Particulars To bal. b/d To sales (Bal. fig.) Total Debtors Account Cr. Rs. 75,000 1,26,000 2,01,000 Cr. Rs. 24,375 49,375 73,750 Cr. Rs. 9,250 31,250 12,500 19,375 3,750 5,125 81,250 Cr. Rs. 25,000 1,750 1,10,000 23,750 1,60,000

Rs. Particulars 11,000 By cash 91,000 By bal. c/d 2,01,000 2) Ascertaining credit purchase Total Creditors Account

Dr. Particulars To cash (31,250 6,250) To balance c/d

Rs. Particulars 25,000 By balance b/d 48,750 By purchase (bal. fig.) 73,750 3) Ascertaining Closing Bank Balance Bank Account Rs. 75,000 6,250 Payments By balance (overdraft) b/d By creditors By general expenses By wages By drawings By bal. c/d (bal. fig.)

Dr. Receipts To debtors To loan from friend

81,250 4) Ascertaining opening capital Dr. Opening Statement of Affairs as on 1-1-2004 Rs. 1,26,875 24,375 9,250 1,60,000 Particulars Plant & machinery Furniture Debtors Stock

Particulars Capital (bal. fig.) Creditors Bank (overdraft)

Illustration 2:
You are given: a) The Balance Sheet of Mr. Shah as at 31st December, 2007. b) The cash account for the year ended 31stdecember 2003. c) Additional information. You are required to prepare a Trading and Profit & Loss Account for the year ended 31 st December, 2003 and Balance Sheet as on that date. Balance Sheet as on 31st December, 2002 Liabilities Sundry creditors Bills payable Outstanding wages Capital Rs. 4,000 8,000 200 19,800 Assets Cash Bills receivable Sundry debtors Stock Furniture Plant & machinery Rs. 3,000 4,000 5,000 4,000 2,000 14,000 32,000

32,000 Cash Account for the year ended 31st December, 2002 Receipts To balance To cash sales To debtors To bills receivable Rs. 3,000 7,000 16,000 15,000 Payments By wages By drawings By payment to creditors By bills payable By sundry expenses By Rent, Rates & Taxes By balance c/d

Rs. 4,000 2,400 7,000 12,000 6,000 4,000 5,600 41,000

41,000

Additional Information: Sundry Debtors 31-12-2003 Sundry creditors 31-12-2003 Bills receivable 31-12-2003 Bills payable 31-12-2003 Stock 31-12-2003 Bills receivable dishonoured during the year Bills payable dishonoured Discount allowed Bills receivable endorsed Bills receivable endorsed dishonoured Discount received 8,000 5,000 9,000 10,000 6,000 1,000 400 500 3,000 400 1,300

Solution:
Mr. Mittal Dr. Trading and Profit & Loss account for the year ended 31-12-2003 Particulars To opening stock To purchase (WN2) To wages Less: o/s for past year To gross profit To discount allowed To rent, rates & taxes To sundry expenses To net profit Rs. 4,000 200 Particulars 4,000 By sales 25,900 - Cash - Credit (WN4) 3,800 By closing stock 21,400 55,100 500 By gross profit b/d 4,000 By discount received 6,000 12,200 22,700 Rs. 7,000 42,100 Rs. 49,100 6,000 55,100 21,400 1,300

22,700

Balance Sheet as on 31-12-2003 Liabilities Capital account: Balance b/d (opening) Add: net profit Less: drawings Sundry creditors Bills payable Rs. 19,800 12,200 2,400 Rs. Assets Rs. Plant Furniture Stock 29,600 Sundry debtors 5,000 Bills receivable 10,000 Cash 44,600 Working Notes: 1) Ascertaining bills payable accepted by Creditors Dr. Particulars To cash To creditors (B/P Dishonored) To balance c/d Bills Payable Account Rs. Particulars 12,000 By balance b/d 400 By sundry creditors (bal. fig.) 10,000 22,400 2) Ascertaining credit purchase: Dr. Particulars To cash To discount To bills payable (WN1) To bills receivable ( endorsed) To balance c/d Sundry Creditors Account Rs. 7,000 1,300 14,400 3,000 5,000 30,700 Particulars By balance b/d By bills payable (dishonored) By debtors (endorsed B/R dishonored) By credit purchase (bal. fig.) Cr. Rs. 4,000 400 400 25,900 30,700 Cr. Rs. 8,000 14,400 22,400 Rs. 14,000 2,000 6,000 8,000 9,000 5,600 44,600

3) Ascertaining bills receivable drawn on debtors Dr. Particulars To balance To debtors (bal. fig.) Bills Receivable Account Rs. Particulars 4,000 By debtors (dishonored) 24,000 By creditors (endorsed) By cash By balance 28,000 4) Ascertaining credit sales Dr. Particulars To balance b/d To B/R (dishonored) To creditors (endorsed B/R dishonored) To credit sales (bal. fig.) Sundry Debtors Account Rs. 5,000 1,000 400 42,100 48,500 Particulars By cash By discount By bills receivable (WN3) By balance c/d Cr. Rs. 16,000 500 24,000 8,000 48,500 Cr. Rs. 1,000 3,000 15,000 9,000 28,000

Illustration 3:
Mr. Sanjay keeps his books by Single Entry. On 1-2-1-2003 his capital was Rs. 69,000. An analysis of his Cash Book for the year gives the following particulars: Debit side Received from sundry debtors Paid on capital account Rs. Credit side 62,000 Due to bank (Jan 1) 7,000 Payment to creditors General expanses Wages Drawings Balance at bank Balance in hand 69,000 Rs. 9,400 27,000 12,000 17,500 5,000 6,000 2100 69,000

Particulars Rs. Rs. Debtors 55,000 90,000 Creditors 17,000 21,500 Stock 19,000 21,000 Plant & machinery 22,000 22,000 Furniture & fittings 3,400 3,400 From the above materials prepare a Profit & Loss A/c for the year ended 31-12-2003 and a Balance Sheet as on that date, after providing 5% interest on capital (ignoring payment in and drawings) 10% depreciation on plant, 5% depreciation on furniture & fittings and a reserve of 5% on Sundry Debtors.

Solution:
Mr. Sanjay Dr. Trading and Profit & Loss account for the year ended 31-12-200 Rs. Rs. 19,000 31,500 17,500 50,000 Particulars By sales By closing stock Rs. Cr.

Particulars To opening stock To purchase (WN1) To wages To gross profit To general expenses To depreciation: Plant Furniture & fittings To interest on capital To reserve for bad debt (5% 90,000) To net profit

Rs. 97,000 21,000

1,18,000 12,000 By gross profit b/d 2,200 170 2,370 5,450 4500 25,680 50,000

1,18,000 50,000

50,000

Balance Sheet as on 31-12-2003 Liabilities Capital Account: Balance b/d (opening) Add: additional capital Add: interest on capital Add: net profit Less: drawings Creditors Rs. 83,000 7,000 5,450 25,680 5,000 Assets Plant & machinery Less: depreciation Furniture & fittings Less: depreciation Stock 1,16,130 Debtors 21,500 Less: reserve for bad debt Cash at bank Cash in hand 1,26,030 Working notes: 1) Ascertaining purchase Dr. Particulars To cash To balance c/d Total creditors A/c Rs. Particulars 27,000 By balance b/d 21,500 By purchase (bal. fig.) 48,500 Cr. Particulars 17,000 31,500 48,500 Rs. Rs. 22,000 2,200 1,400 170 90,000 4,500 Rs. 19,800 3,230 21,000 85,500 6,000 2,100 1,26,030

2) Ascertaining sales: Dr. Particulars To balance b/d To sales (bal. fig) Total debtors A/c Rs. Particulars 55,000 By cash 97,000 By balance c/d 1,48,000 Cr. Particulars 62,000 90,000 1,48,000

Illustration 4:
Mr. Manish does not maintain regular books but keeps only memoranda of his transactions. He furnishes the following information from the memoranda for the year ended 30-9-01: (a) (b) (c) Total collection from Debtors (in cash) Rs. 60,000. Cash Sales Rs. 38,400. The abstract of Bank account for the year ended 30-9-01:

Particulars To Deposits (Cash)

Rs. Particulars 95820 By Balance (overdraft) on 1-10-2000 By Interest and Bank Charges By Drawings By Salaries By General Expenses By Creditors By Balance on 30-9-01

Rs. 9600 180 4800 20400 19020 36000 5820

(d)

(e) (f)

95820 95820 Other balance as on 1-10-2000 were : Stock Rs. 21600, Debtors Rs. 52800, Furniture Rs. 2400, and Building Rs. 36000 Creditors Rs. 19200 Cash in hand Rs. 200 He purchased an old scooter at Rs. 2400 on 1-7-01 Besides cash balance, other balances on 30-9-01 were: Stock Rs. 24480, Debtors Rs. 72000, Creditors Rs.13200

Prepare a profit and loss account for the year end 30-9-2001 and balance sheet on that date after charging Depreciation @ 10% p.a. on Building, Furniture and Scooter.

Solution:
Mr. Manish Dr. Trading and Profit &Loss Account For the year ended 30-9-2001 Rs. Particulars 21600 By Sales : 30000 Cash 90480 Credit (WN 2) By Closing Stock 142080 180 By Gross Profit b/d 20400 19020 240 3600 60 46980 90480 Balance Sheet as at 30-9-2001 Liabilities Capital as on 1-10-2000 (WN 1) Add : Net Profit Less : Drawings Sundry Creditors Rs. Assets 84200 Buildings Less : Depreciation 46980 Furniture 131180 Less : Depreciation 4800 Scooter 13200 Less : Depreciation Stock-in-trade Sundry Debtors Cash at Bank Cash in Hand (WN 4) 139580 Rs. 36000 3600 2400 240 2400 60 24480 72000 5820 380 139580 90480 Cr. Rs. 38400 79200 24480 142080 90480

Particulars To Opening Stock To Purchase (WN 3) To Gross Profit c/d To Interest and Bank Charges To Salaries to staff To general Expenses To Deprecation : Furniture Buildings Scooter (for 3 month) To Net transferred to Capital

Working Notes: 1) Ascertaining Opening Capital Balance Sheet as at 1-10-2000 Liabilities Sundry Creditors Bank Overdraft Capital (balancing figure) Rs. 19200 9600 84200 Assets Cash in Hand Sundry Debtors Stock-in-trade Furniture Buildings Rs. 200 52800 21600 2400 36000 113000

113000 2) Ascertaining Credit Sales Dr. Particulars To Balance b/d To Sales (balancing figure) Total Debtors Account Rs. Particulars 52800 By Cash 79200 By Balance c/d 132000 3) Ascertaining Purchase Dr. Particulars To Bank To Balance c/d Total Creditors Account Rs. Particulars 36000 By Balance b/d 13200 By Purchase (balancing figure) 49200 4) Ascertaining Closing Balance of Cash Dr. Receipts To balance b/d To sundry debtors To cash sales Cash Account Rs. 200 60000 38400 98600 Payments By bank By scooter By balance c/d Cr. Cr.

Cr. Rs. 60000 72000 132000

Rs. 19200 30000 49200

Rs. 95820 2400 380 98600

Fire Insurance Claim


A trader faces the risk of loss of his property by fire. He can cover this risk by paying a small amount of premium to an insurance company for taking out a fire insurance policy. The insurance company, in turn, agrees to bear the loss of property by fire. If the trader actually suffers a loss, he can make a claim on the insurance company for compensation. A fire insurance policy may cover loss of fixed assets or loss of stock or loss of profits etc. When there is loss of stock by fire, the trader must submit a claim to the insurance company. The claim must give detail regarding the value of the stock on date of fire, the value of stock saved (salvage) the ratio of loss to the value of policy and so on.

Illustration 1:
The premises of PQR Limited were destroyed in fire on 15-8-2003. The records, however, were saved wherefrom the following particulars were available. Stock at cost on 31-3-2002 Stock (as per B/S on 31-3-2003) Purchase during the year 2002-2003 Sales during the year 2002-2003 Purchases from 1-4-2003 to 15-8-2003 Returns outwards during 1-4-2003 to 15-8-2003 Carriage outwards in July 2003 1, 44,000 1, 57,000 7, 94,960 9, 71,200 4, 68,000 12,000 4,800

Rs. 5,000 has been written off certain stock, which was a poor selling line, while valuing the stock for balance sheet as at 31-3-2003. The cost of such stock was Rs. 15,000. A portion of this stock was sold in May 2003 at a loss of Rs. 500on the original cost of Rs. 7,500. The balance of this stock was now estimated to be worth the original cost. Excepting the above, the Gross profit has remained at uniform rate throughout. The stock salvaged was Rs. 10,000. On 10-8-2003, goods worth Rs. 4,700 were received by the godownkeeper, but were not recorded in the purchase account. The insurance policy was for Rs. 96,000, with an average clause in it. You are required to ascertain the amount of loss of stock which was to be claimed from the insurance company.

Solution:
A. Computing Gross Profit Rate Dr. Particulars To opening stock To purchase To Gross Profit Trading Account Rs. Particulars 30,000 By sales 2,00,000 By closing stock (at full cost) 62,000 Cr. Rs. 2,50,000 42,500

2,92,500 2,92,500 Note: For computing the normal GP Rate, the closing stock must be valued at full normal cost i.e. Rs. 1, 57,000 + 5,000 = Rs. 1, 62,000. Gross Profit Rate (Normal GPR) = Normal Gross Profit 100 = 1, 94,240 100 Normal Sales 9, 71,200 = 20%

B. Computing Stock Dr.


Particular s To opening stock (at full cost) To purchase (3,41,60012,000) To gross profit (20% 4,61,000) Normal 1,47,000

Memorandum Trading Account (From 1-4-2003 to 15-8-2003)


Abnorm al 15,000 Total 1,62,000 Particul ars By sales Normal 4,61,000 Abnorm al 7,000

Cr.
Total 4,68,000

3,29,000

3,29,000

92,000

92,000

By P & L A/c (Loss on sale) By closing stock (Bal. fig.)

500

500

1,07,800

7,500

1,15,300

5,68,800

15,000

5,83,800

5,68,800

15,000

5,83,800

Note: For computing value of stock on date of fire, opening stock of abnormal items must be valued at full normal cost i.e. Rs. 15,000. The balance (Rs. 1, 62,000 Rs. 1, 47,000) is at the cost of opening stock of normal items.

C. Computing Loss Rs. Closing Stock (on date of fire) - Normal - Abnormal Add: Goods received but not recorded 1, 07,800 7,500 Rs.

1, 15,300 4,700 1, 20,000

Less: Salvage Loss

10,000 1,10,000

Note: 1) For computing loss and claim, stock of abnormal items must be valued at full normal cost as it is now estimated to be worth the original cost. 2) The goods received but not recorded were in the godown at the time of fire and were also destroyed. These also must be added to the closing stock in order to compute the total loss of goods. D. Computing Claim Claim = Policy Loss = Stock 96,000 1, 10,000 = Rs. 88,000

1, 20,000

Illustration 2:
A fire occurred in the premises of Nestle on 25th August 2003 when a large part of the stock was destroyed. Salvage was Rs.15000/-. Nestle gives you the following information for the period of January 1, 2003 to August 25th 2003. (a) (b) (c) (d) Purchase Rs.85000/Sales Rs.90000/Goods costing Rs.5000/- were taken by nestle for personal use. Cost price of stock January 1, 2003 was Rs.40000/-.

Over the past few years, Nestle was been selling goods at a consistent gross profit margin of 331/3%. The insurance policy was Rs.50000/-. It includes an average clause. Nestle asks you to prepare a statement of claim to be made on the insurance company.

Solution:
A. Computing Stock: Dr. Particulars To Stock(Opening) To Purchase Less: Drawing To gross profit @ 331/3% Of sales Memorandum Trading Account (1-1-20013 to 25-8-2003) Rs Rs Particulars 40,000 By Sales 85,000 By Closing Stock 5,000 80,000 ( Bal.fig) 30,000 1,50,000 Cr. Rs 90,000 60,000

Rs

1,50,000 Rs. 60,000 15,000 45,000

B. Computing Loss: Closing stock on 25th August 2003 Less: Salvage Loss C. Computing Claim: Value of stock on hand Amount of policy Claim = Policy Loss = 50,000 45,000 Stock 37,500 = Rs. 60,000

60,000 50,000

Illustration 3:
A fire occurred in premises of Good luck & Co. On 1 st September 2004 stock all the value of Rs.101000/-was salvage and business record were saved. The following information was obtained. Purchases for the year ended 31-3-2004 Sales for the year ended 31-3-2004 Purchase from1-3-2004 to 1-9-2004 Sales from 1-3-2004 to 1-9-2004 Stock on 31-3-2003 Stock on 31-3-2004 3, 50,000 5, 50,000 1, 20,000 1, 80,000 1, 50,000 1, 80,000

Stock on 31-3-2004 was overvalued by Rs.10000/-. The sales and purchase occurred at even rate over the month. Calculate the amount of claim to be presented to the insurance company. Rate of gross profit is constant.

Solution:
A. Computing gross profit rate: Trading Account (For the Year ended 31-3-2004) Rs. Particulars 1,50,000 By Sales 3,50,000 By Closing Stock 2,20,000 (1,80,000-10,000) 7,20,000 Note: The closing stock must be taken at cost to find the out the normal GPR Gross profit rate = Normal gross profit 100= 2, 20,000 100= 40% Normal Sales 5, 50,000

Dr. Particulars To Opening Stock To Purchase To Gross profit

Cr Rs. 5,50,000 1,70,000 7,20,000

B. Computing stock on date of fire Memorandum trading account (1-4-2004 to 1-9-2004) Rs. Particulars 1,70,000 By sales (1,80,000/6X5) 1,00,000 By closing stock 60,000 3,30,000

Dr Particulars To opening stock To purchase (1,20,000/6X5) To gross profit (1, 50,00040%)

Cr. Rs. 1,50,000 1,80,000 3,30,000

C. Computing Loss: Closing stock (On date of fire) Less Salvage Loss

Rs. 80,000 50,500 29,500

Illustration4:
A fire occurred in the premises of m/s Prerana & Co. On 31 st December 2000 and stock of the value of Rs. 50,500 was salvaged. The following information was obtained: Particulars Purchases for the year ended 31-3-2000 Sales for the year ended 31-3-2000 Purchase from 1-3-2000 to 1-9-2000 Sales from 1-3-2000 to 1-9-2000 Stock on 31st March, 1999 Stock on 31st March, 2000 Rs. 3,50,000 5,50,000 1,20,000 1,80,000 1,50,000 1,70,000

Further information is given that the stock on 31-3-2000 was overvalued by Rs. 10,000 calculate the amount of the claim in respect of losses. Rate of Gross Profit based on the year ended 31-32000.

Solution:
A. Computing GPR Dr. Particulars To opening stock To purchase To G.P. Trading A/c for the year ended 31st March, 2000 Rs. 1,50,000 3,50,000 2,10,000 7,10,000 G.P. Ratio = GP Sales 100 = 2, 10,000 100 = 38.18% 5, 50,000 Particulars By sales By closing stock (1,70,000 10,000) Cr. Rs. 5,50,000 1,60,000 7,10,000

B. Computing stock Dr. Particulars To opening stock To purchase Less: March To G.P. (38.18% of sale) Rs. Memorandum Trading Account Rs. Particulars 1,60,000 By sales 1,20,000 Less: March 30,000 90,000 By closing stock 52,720 3,07,270 Cr. Rs. Rs. 1,80,000 30,000 1,50,000 1,57,270 3,07,270

C. Computing loss Stock on the date of fire Less: salvage value Actual loss of stock 1, 57,270 50,500 1, 06,770

D. Computing Claim Claim = loss of stock = Rs. 1, 06,770

Accounting Standard 1
Accounting standard 1 is refers to disclosure of accounting policies. It is issued by the institute of charted accountant of India. It is deals with the disclosure of significant policies followed in preparing and presenting final accounts. It was recommendatory, but now it is mandatory. The disclosure of the accounting policies followed is required by law in some cases. The accounting policies are refers to the specific accounting principles and the methods of applying those principles adopted by the concern in the preparation and presentation of final account.

Objectives of Accounting Standard One:


1) Accounting standard 1 is Mandatory. (a) Recommendatory (b) Mandatory (C) Optional (d) No longer valid 2) Accounting standards are to be used in the presentation of general purpose financial statements. (a)For the completion of taxable income. (b) For calculating net profits available for payments dividends. (c) In the presentation of general purpose financial statements. (d) For preparing only for cash flow statements. 3) Accounting standards in India are issued by Accounting Standards Board of ICAI. (a) Institute standard of India (ISI). (b) Accounting of Standards Board of ICAI. (c) The central government. (d) The international accounting standards boards. 4) Interest to be recognized on time basis AS 9. (a) AS1 (b) AS2 (c) AS9 (d) AS10 5) The cost of inventories should comprise all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. (a) AS1 (b) AS2 (c) AS9 (d) AS10

ACCOUNTING STANDARD -2
AS-2 deals with the Valuation of Inventories, issued by Institute of Chartered Accountants of India (as applicable from 1-4-1999), deals with Valuation of Inventories. As 2 defines Inventory as assets held for sale in the ordinary course of business. Valuation of stock means finding out the proper value at which the closing stock is to be brought in the books and shown in the final accounts. Stock must be properly valued i.e. neither over valued nor undervalued. Over valuation of stock, leads to higher profits and larger current assets. Under valuation stock results in lower profits and smaller current assets.

MATCH THE FOLLOWING:


Column A a. According to AS-2, inventories includes b. According to AS-2, inventories excludes c. According to AS-2,inventories should be valued at d. Why are stocks basically valued at cost e. Comparison between cost and NRV is made Answers 1.land held by a developer of resale 2.work-in-progress arising under construction contract 3.lower of cost and net realizable value 4.based on principles of Matching cost with revenue 5. at year end

ACCOUNTING STANDARD- 9:
AS- 9 (recognition of revenue) deals with recognition of revenue (booking of income in the profit and loss account of a concern. The income may be from sale of goods or fees from services or interest, royalty, dividends, etc. According to AS-9 , revenue means the amounts earned from the customers for goods sold, services given, or for use of funds or assets. Total revenue is computed by adding up the sale price of goods sold, fees for services, interest on loans given, dividend on shares and royalty for use of patents, know how etc.

AS-9 actually defines Revenue in the following technical terms:- Revenue is the gross inflow of cash, receivables of other considerations arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise recourses yielding interest, royalties and dividends.

STATE WHETHER TRUE OR FALSE:


1. 2. 3. 4. 5. AS-9 does not deal with insurance contracts :- True AS deals with revenue arising from lease agreements:- False Interest is recognized when actually received :- False AS-9 does not deal with revenue arising from construction contracts:- True AS-9 does not deal with revenue arising from Government Grants:- True

CAPITALS AND REVENUE: EXPENDITURE AND RECEIPTS


Accounting is the recording and reporting of business transactions. Business transactions involve activities of actual business (selling goods or services), investment (purchasing assets) and financing (raising money for investment) Expenditure means a payment made by a business to obtain some benefit i.e. assets, goods, services. Capital expenditure means an expenditure carrying probable future benefits. Revenue expenditure means an expenditure means from which no future benefit is expected. Cost means the amount of expenditure incurred on a specific article, product or activity. Expense means a cost relating to the operations during the accounting year.

Answer in One Word


1) The amounts invested in the concern by its owner:Ans. Capital 2) Assets which does not have a physical identity:Ans. Intangible assets 3) The cost of expenditure from which no further benefits is expected:Ans. Expired cost 4) The receipts which is used for use of funds or use of assets:Ans. Revenue receipt 5) An expenditure carrying probable future benefits:Ans. Capital expenditure