Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Accountancy Class 11

Commerce : Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

The document Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev is a part of the Commerce Course Accountancy Class 11.
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FINANCIAL STATEMENTS OF SOLE PROPRIETORSHIP

Learning Objectives After studying this lesson you will be able to

  • State the nature of the financial statements.
  • Distinguish between the capital and revenue expenditure and receipts.
  • Explain the concept of trading and profit and loss account and its preparation.
  • State the nature of gross profit, net profit and operating profit.
  • Describe the concept of balance sheet and its preparation.
  • Explain grouping and marshalling of assets and liabilities.
  • Prepare profit and loss account and balance sheet of a sole proprietorfirm.

Teaching Methodology : For teaching this topic the teacher should use discussion method, explanation method, illustration method etc.

Financial Statements 

Financial statement are those statement that show the profitability (Income statement) and the financial position (Balance Sheet) of the business at the end of accounting period.
In the word of John N. Myer "The financial statement provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement showing the result of operation during a certain period"

Final statements include these statements:

i) Income statement (Trading and Profit and Loss Account) - Prepared to ascertain gross profit and net profit/loss during an accounting period.

ii) Statement of Financial Position (Balance Sheet) -Prepared to ascertain position (assets, liabilities and capital) of an enterprise at a particular point of time.

iii) Schedules and notes forming part of Balance sheet and income statement - to give detail of various items shown in both the statements.

These two Financial Statements (Income Statement and Statement of Financial Position) are termed as 'Final Accounts'.

Objective of Preparing Financial Statements. 

i) To present a true and fair view of the financial performance (Profit/Loss) of the business.

ii) To present a true and fair view of the financial position (Assets/Liabilities) of the business.

Capital Expenditure: The non-recurring expenditure whose benefit is derived by the business for more than a year is called Capital Expenditure.
It includes amount spent or liabilities incurred to acquire or improve any fixed assets or acquiring any legal rights or first-time expenses in curred to make fixed assets work able e.g . purchase of machinery/building/furniture etc., expenses incurred to acquired Patents, Trade-mark etc. and expenditure incurred for getting an asset ready to use (like installation exp., carriage, first time expenses incurred on second hand fixed asset for making it ready to use).

Capital expenditures are recorded on the assets side of the Balance sheet.

Revenue Expenditure 

The recurring and routine nature expenditures which are incurred for operating the business smoothly and which help to maintain business's earning capacity, are called Revenue expenditure e.g. expenses incurred for producing finished goods such as direct expenses, purchase of raw material and other expenses as rent, salary, repairs etc.
The benefit of these expenses last in one year (give benefit up to one year). These expenses are shown in Debit side of income statement (trading and profit and loss account).

Deferred Revenue Expenditure : The expenditure which is revenue in nature, but the heavy amount spent and benefit likely to be derived over a number of years called deferred revenue expenditure e.g. heavy expenses on advertising on launching of a new product and hence it is capitalized like any fixed asset.

Accounting treatment of Deferred Revenue Expenditure.
As per matching principle, expenses incurred in an accounting period are matched with the revenue recognized in that accounting period. So the whole deferred revenue expenditure should be spread over the number of years over which benefit is likely to be derived.
During the current accounting year (a) Only that portion of the expenditure should be charged to the profit and loss account which has facilitate the enterprise to earn revenue during current year (b) Remaining amount of expenditure be carried forward to the next year and shown in the assets side of balance sheet (It is also called a fictitious asset).

Capital Receipt.
Capital receipts are those irregular receipts that don't affect profit or loss of business; it either increases the liabilities (raising of loan) or reduces the fixed assets (by sale of fixed assets), so it will be shown in balance sheet.
Capital receipts are not made available for distribution of profit to the owner.

Revenue Receipt

Revenue receipts are received in the normal and regular course of business like Receipts from sale of goods and rendering services to customers. Income from non-operating business activities (like income from investment i.e. interest and dividend received and rent received, Commission and other fees received for non-operating business etc. These receipts increases profit and shown in the credit side of the Trading and Profit and Loss account.

Types of Expenses 

Direct Expenses : Those expenses which are incurred on purchasing of goods and for converting raw material into the finished goods e.g.

Manufacturing wages, Expenses on purchases (including all duty and tax paid on purchases), Carriage/Freight/Cartage inwards, Production expenses (such as power and fuel, water etc.), factory expenses (e.g. lighting, rent and rates). Royalty based on Production etc.

Note: All direct expenses are debited to Trading account.

Indirect Expenses: Those expenses which are not directly related to production or purchase of the goods are called indirect expenses. It includes those expenses which are related to office and administration, selling and distribution of goods and financial expense etc.

These expenses are show in the debit side of the Profit and Loss A/c.

Calculation of Gross Profit

Gross Profit = Net Sales - Cost of Goods Sold

Net Sale = Total sale - Sales Return

Cost of Goods Sold = Opening Stock + Net Purchases + Direct

Expenses (wages, Expenses on Purchases, Carriage inward etc.) - Closing stock

Net Purchases = Total Purchases - Purchases Return


Calculation of Operating Profit

Operating Profit = Net Sales - Operating Cost

or             = Gross Profit - (Office and Administrative Expenses + Selling and distribution etc.)

Operating Cost = Cost of Goods Sold + Office and Administrative Expenses + Selling and distribution exp.

Net Profit = Operating Profit + Non-operating income - Non-operating expenses.

Operating Expenses = The expenses which are related to the main or normal activities of the business e.g. office and Administrative expenses, selling and distribution expenses, Operating profit is also called EBIT (Earnings before interest and taxes)


INCOME STATEMENT
It is divided into two parts:

1. Trading Account which shows the gross profit or gross loss.

2. Profit and Loss Account which shows the net profit or net loss.

Format of Trading Account 

Name of Business Firm _ 

Trading A/c

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev
Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev
Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Illustration 1 Opening stock ?30,000, Net Purchase Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev54600 expenses on purchase Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev5000, Net Sales Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev100,000, closing stock Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev40,000 calculate cost of goods sold and gross profit.
Solution: Cost of Goods sold = Opening stock + Net Purchase + expenses on purchase - Closing Stock Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 30,000 + Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 54,600 + Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 5,000 -Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 40,000
= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 49,600
Gross Profit = Net sales - Cost of goods sold Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 100,000-Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 49,600
= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 50,400

Illustration 2 Net sales during the year is Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 3,00,000, Gros profit is 25% on sales. Find out cost of goods sold.

Solution: Gross Profit = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Cost of goods sold = Net Sales - Gross Profit = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 300,000 -Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 75,000
= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 2,25,000

Illustration 3 Net sales during the year is Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 6,00,000. Gross profit is 25% on cost. Find out gross profit and cost of good sold.
Solution: Here, Gross Profit is 25% on cost Hence, If cost is Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev100,Gross Profit will be Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 25 and sales will be Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 125

Thus, If sales is Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev125, Gross Profit will be Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 25 

If sales is Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 600,000, Gross Profit will be 600,000 x Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRevChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1.20,000 Cost of goods sold = Net Sales-Gross Profit

= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 6,00,000- Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,20,000 = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 4,80,000

Note: Gross profit 25% or Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev on cost is equal to Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev th on sales

Gross profit = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 6,00,000 x Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,20,000


Illustration 4 Calculate Net Sales and Gross Profit from the following information.

Cost of goods sold Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 2,00,000

Gross profit 20% on sale

Solution

Let sale=x

Sale = Cost of good sold + Gross Profit x = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 200,000+ .20x

x = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 250,000

Gross Profit = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev250,000-Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev200,000 = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 50,000

 

Note: Gross Profit 20% or Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev on sale, equal to Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev oncost Gross Profit= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 200,000 x Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 50,000

 

Illustration 5 Calculate Gross Profit ?

Total Purchase                        680,000

Purchase Return                     30,000

Direct Expenses                      70,000

Carriage Outwork                    15,000 3/4 of the goods are sold Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 600,000

Solution

Cost of goods sold             = Total Purchase-Purchase Return-Direct Expenses

= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev6,80,000 - Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 30,000 +Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev70,000 = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 7,20,000

Cost of 3/4 of the goods sold =Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 7,20,000 x  Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 5,40,000

Gross Profit       = Sales-Cost of goods sold

= Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev6,00,000- Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 5,40,000 = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev60,000


Illustration 6

Calculate the amount of operating profit from the following balances:

                                        Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

 Net sales                     5.00. 000

Cost of goods sold       3.00. 000

Operating Expenses    1,20,000

Solution 

Operating Cost  = Cost of Goods Sold + Operating Expenses Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 3,00,000+Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,20,000 =Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 4,20,000

Operating Profit = Net Sales - Operating CostChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 5,00,000-Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 4,20,000 = Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 80,000

 

Illustration 7

Calculate the value of closing stock from the following information:

                                          Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev                                           Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Purchase                    93,000 Wages                                  20,000

Sales                           1,20,000 Carriage Outward              3,200

Rate of Gross Profit 40% on sales

Solution
Trading Account for the year ended

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Illustration 8 This information is provided by Mr. Rohit Stock as on 01.04.2015 Rs. 20,000 During the year Sales was Rs. 4,00,000; Purchases Rs. 2,90,000; Carriage Inwards Rs. 8,000; Clearing charges Rs. 10,000; Sales Returns Rs. 3,000; Purchases Returns Rs. 4,000; Carriage Outwards Rs. 5,000 and Stock on 31.03.2016 was Rs. 30,000.
Calculate cost of goods sold and prepare Trading Account for the year ending 31.03.2016

Solution:
Trading Account for the year ended on March 31, 2016

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Adjusted Purchase: Sometimes the opening and closing stock are adjusted through purchases account. In that case, the entry recorded is as follows: Closing StockA/c Dr.
To Purchase A/c This entry reduces the amount in the purchases account and is also known as adjusted purchases which is shown on the debit side of the trading and profit and loss account.
When the opening and closing stocks are adjusted through purchases, the trial balance does not show any opening stock. Instead, the closing stock shall appear in the trial balance (not as additional information or as an adjustment item) and so also the adjusted purchases.

Illustration 9 Prepare the Trading Account for the year ended 31st March, 2015 from the following information. Adjusted purchaseChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 25,00,000; Freight outwardsChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 15,000; WagesChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,68,000; Octroi charges Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 2,000; Carriage inwards Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 20,000; Fuel & Power Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 30,000; Office rent Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 18,000; Trade expenses Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 10,000; Sales Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 32,00,000; Closing StockChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,50,000

Solution:
 Trading Account for the year ending 31st March, 2015

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Format of Profit and Loss Account Profit and Loss A/c for the year ending.......

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev
Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev
Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev
Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

* The words 'To' and 'By' are generally not used these days.
* The name of Business Firm is stated on the top of trading & P & L A/c.

Illustration 10 From the following information, prepare a Profit & Loss Account for the year ending 31 st March 2016.
Gross Profit Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev70,000; Rent Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev5,000; Salary Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 15,000; Wages Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev8,000; Commission paid Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev7,000; Interest on loans Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev5,000; Advertising Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev3,000; Discount Received Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev2,000; Printing & StationeryChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,000; Legal charges Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev2,500; Bad Debts Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,500; DepreciationChapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev 1,000; Income received on Investment Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev3,000; Loss by Fire Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev2,200; Bad Debts recovered Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev200; Freight outward ?600, Audit Fee Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev450.
Solution:

Profit and Loss A/C of ...... for the year ending 31st March, 2016

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev


Illustration 11 From the following balances obtained from the accounts of Mr. Hemant, prepare the Trading and Profit & Loss Accounts:

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev


Closing stock on March 31,2016 is? 4,500.
Solution:
 Books of Mr. Hemant Trading and Profit & Loss Account for the year ended on March, 31, 2016

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

Chapter Notes - Financial Statements of Sole Proprietorship-I Commerce Notes | EduRev

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