All questions of Unit 1: Final Accounts of Non-Manufacturing Entities for CA Foundation Exam

The cost of goods sold is calculated by adding the opening stock and purchases together and then subtracting the closing stock. Direct expenses are not subtracted in this formula as they are already included in the cost of purchases.

The net effect on the Profit and Loss Account is the difference between the discount received and the discount allowed.
Net Effect = Discount Received - Discount Allowed
Net Effect = $18,000 - $19,000 = Net loss of $1,000

Understanding the Income Statement Components
The Income Statement reflects a company's financial performance over a specific period. For non-manufacturing concerns, this statement primarily includes the Profit and Loss account, but not the Trading account or Balance Sheet.
Key Components of the Income Statement
- Trading Account:
- Typically used by manufacturing companies to calculate the gross profit by showing sales and cost of goods sold.
- Non-manufacturing concerns do not have a trading account since they do not deal with inventory or manufacturing goods.
- Profit and Loss Account:
- This part of the Income Statement summarizes revenues and expenses to determine net profit or loss for the period.
- All non-manufacturing entities prepare this account to assess their profitability.
Balance Sheet Exclusion
- Balance Sheet:
- The Balance Sheet is not a part of the Income Statement.
- It represents the financial position of a business at a specific point in time, showing assets, liabilities, and equity.
- While integral to financial reporting, it is separate from the Income Statement.
Conclusion
In summary, the correct answer is option 'C' because the Balance Sheet does not belong to the Income Statement for a non-manufacturing concern. The Income Statement mainly comprises the Profit and Loss account, while the Trading account is irrelevant for non-manufacturers, who focus solely on their revenues and expenses.

Net profit or loss is calculated by subtracting total expenses from gross profit.
Total Expenses = $11,000 + $25,000 + $32,000 + $1,000 + $17,000 + $12,000 + $27,000 = $125,000
Net Profit/Loss = Gross Profit - Total Expenses
Net Profit/Loss = $42,000 - $125,000 = Net loss of $83,000

The final accounts of a sole proprietorship are prepared to assess the profitability and financial position of the business. This includes the preparation of an income statement and a balance sheet that reflect the business's performance and financial status at the end of the accounting period.

Non-manufacturing entities are businesses that do not engage in the production or manufacturing of goods. Instead, they focus on providing services or selling goods in their original form without any processing. The true statement regarding non-manufacturing entities is option 'B': They sell goods in their original form without processing.

Explanation:

1. Non-manufacturing entities do not engage in processing:
Non-manufacturing entities primarily focus on providing services rather than producing or processing goods. They may offer a wide range of services, such as consulting, banking, insurance, healthcare, education, transportation, etc.

2. Selling goods in their original form:
While these entities may sell goods, they do so without any processing or alteration. Goods are sold as they are received from suppliers or manufacturers. For example, a retail store that sells clothing buys the clothes from manufacturers and sells them to customers without making any changes to the product.

3. Differentiating manufacturing and non-manufacturing entities:
Manufacturing entities, on the other hand, are involved in the production or processing of goods. They take raw materials or components and transform them into finished products through various manufacturing processes. These finished products are then sold to customers.

4. Examples of non-manufacturing entities:
Some examples of non-manufacturing entities include service-based businesses like banks, hospitals, law firms, restaurants, hotels, airlines, etc. These entities primarily provide services or sell goods in their original form without any processing.

In conclusion, the true statement regarding non-manufacturing entities is that they sell goods in their original form without processing. These entities focus on providing services or selling goods without engaging in the manufacturing or processing of goods.

The journal entry to record the closing stock at the end of the year is to debit the Closing Stock Account and credit the Trading Account. This entry reflects the value of unsold stock as an asset at the end of the year.

Treatment of Purchase Returns in the Trading Account

In the Trading Account, the treatment of purchase returns is to deduct them from purchases on the debit side.

Explanation:
The Trading Account is a financial statement that shows the gross profit or loss of a business. It is prepared to determine the profitability of the trading activities of a company.

1. What are Purchase Returns?
Purchase returns, also known as returns outwards or returns to suppliers, occur when a buyer returns goods to the supplier due to various reasons such as damaged goods, incorrect quantity or quality, or dissatisfaction with the product.

2. Purpose of Trading Account:
The Trading Account is prepared to calculate the gross profit or loss made by a business through its trading activities. It includes the following elements:
- Opening stock
- Purchases
- Purchase returns
- Direct expenses (if any)
- Closing stock

3. Treatment of Purchase Returns:
Purchase returns are deducted from purchases on the debit side of the Trading Account. This is because purchase returns represent a reduction in the total purchases made by the business during a specific period.

When purchase returns are deducted from purchases, the net purchases figure is obtained. Net purchases are the actual purchases made by the business after deducting the returns. This figure is then used to calculate the cost of goods sold and determine the gross profit or loss.

4. Example:
Let's consider an example to understand the treatment of purchase returns in the Trading Account:

Opening stock: $10,000
Purchases: $50,000
Purchase returns: $2,000
Closing stock: $15,000

Calculation:
Net purchases = Purchases - Purchase returns
Net purchases = $50,000 - $2,000 = $48,000

Cost of goods sold = Opening stock + Net purchases - Closing stock
Cost of goods sold = $10,000 + $48,000 - $15,000 = $43,000

Gross profit = Sales - Cost of goods sold

By deducting purchase returns from purchases, we obtain the net purchases figure, which is then used to calculate the cost of goods sold and ultimately determine the gross profit or loss of the business.

Therefore, the correct treatment of purchase returns in the Trading Account is to deduct them from purchases on the debit side.

Direct expenses in the context of the Trading Account are those expenses that are directly related to the purchase and preparation of goods for sale, such as freight and carriage on purchases.

Given:
Gross profit = $42,000
Management expenses = $11,000
Other income = $18,000

To find:
Net profit

Net profit can be calculated using the formula:
Net profit = Gross profit - Management expenses + Other income

Substituting the given values into the formula, we get:
Net profit = $42,000 - $11,000 + $18,000

Simplifying the equation, we get:
Net profit = $49,000 + $18,000

Therefore, the net profit is $53,000.

Explanation:
The gross profit of a company is the total revenue earned from its primary business activities, minus the cost of goods sold. In this case, the gross profit is given as $42,000.

Management expenses are the costs incurred in running and managing the company's operations. These expenses include salaries, office rent, utilities, etc. In this case, the management expenses are given as $11,000.

Other income refers to any additional revenue earned by the company from non-primary business activities. This could include interest income, rental income, or gains from the sale of assets. In this case, the other income is given as $18,000.

To calculate the net profit, we subtract the management expenses from the gross profit and add the other income. This gives us the final figure for the company's net profit.

In this case, the net profit is calculated as $42,000 - $11,000 + $18,000 = $49,000 + $18,000 = $53,000. Therefore, the correct answer is option B, $53,000.

Carriage inwards refers to the cost incurred to bring the materials to the firm's location and make them available for use, essentially the cost of transporting raw materials to the place where they are needed for production or sale.

The journal entry to write off bad debts is to debit the Bad Debts Account and credit the Debtors Account, reflecting the loss and reducing the accounts receivable.
Journal Entry: Debit Bad Debts Account $17,000, Credit Debtors Account $17,000

The cost of goods sold (COGS) is calculated as:
COGS = Opening Inventory + Purchases + Wages + Carriage Inwards - Closing Inventory
COGS = $10,000 + $60,000 + $5,000 + $3,000 - $20,000 = $58,000

Closing inventory is valued at cost or net realisable value, whichever is lower, to ensure that the inventory is not overstated on the financial statements.

The Trading Account of a non-manufacturing business entity shows the gross profit or gross loss, which is the difference between the sales revenue and the cost of goods sold.

The net invoice amount after a trade discount is calculated by subtracting the discount from the invoice price.
Trade Discount = 10% of $1,000 = $100
Net Invoice Amount = Invoice Price - Trade Discount
Net Invoice Amount = $1,000 - $100 = $900

The Matching Principle requires that expenses be recorded in the same accounting period as the revenues they help to generate, ensuring that each period's net income or loss reflects the actual economic activity.

Sales returns are deducted from the total sales on the credit side of the Trading Account to reflect the net sales.

Depreciation is an expense and is debited to the Profit and Loss Account. It represents the allocation of the cost of a fixed asset over its useful life.

The Matching Principle in accounting states that expenses should be matched with the revenues they helped generate. This ensures that the income statement reflects the true profit or loss for the period.

Outstanding salaries are added to the salaries expense in the Profit and Loss Account and shown as a liability in the Balance Sheet. This follows the accrual basis of accounting, where expenses are recognized when incurred, not when paid.

If the credit side (which includes sales and closing inventory) of the Trading Account exceeds the debit side (which includes opening stock, purchases, and direct expenses), it indicates a gross profit.

Capital receipts are proceeds from the sale of fixed assets or additional investments by owners. The sale of old machinery would be considered a capital receipt as it is related to a fixed asset.

If the debit side of the Trading Account exceeds the credit side, it indicates a gross loss. This means that the cost of goods sold and direct expenses are greater than the sales and closing inventory.

Net sales are calculated by subtracting returns inward from total sales.
Net Sales = Sales - Returns Inward
Net Sales = $100,000 - $10,000 = $90,000

Depreciation expense reduces the net profit because it is an expense.
Effect on Net Profit = Gross Profit - Depreciation Expense
Effect on Net Profit = Decrease by $65,000

Since the net profit is $1,000 more than the gross profit, it indicates that other incomes exceed expenses by $1,000.

Income received in advance is a liability because it represents revenue that has been received but not yet earned. It is an obligation to provide goods or services in the future.

Gross profit is the profit calculated after deducting direct expenses (such as cost of goods sold) but before deducting indirect expenses (such as administrative and selling expenses). It is the profit from trading activities before any other overheads or taxes are considered.

Interest paid on loans is an expense and should be recorded as a debit in the Profit and Loss Account.