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Short answers :
Question.1 : Why is it necessary to record the adjusting entries in the preparation of final accounts?
Answer : It is extremely important to record the adjusting entries in the preparation of final accounts.
1. This is done in order to assess the true net profit or net loss of the business organisation.
2. It helps us record those adjustments which were left or omitted and were not recorded in the accounts.
3. It assists us to separate all the financial transactions into a year-wise category. The financial statements include only those entries which belong to the current year. It rules out the previous and forthcoming years’ entries which are the basis for accrual basis of accounting.
4. Further, it provides us the room for making various provisions which are made at the end of the year, after assessing the entire year’s performance.
Question.2 : What is meant by closing stock? Show its treatment in final accounts.
Answer :Closing stock implies the value of unsold goods at the end of an accounting period. The valuation of closing stock is done on the basis of its cost price or the realisable value, whichever of the two is lesser.
Example: If a good with the cost price of Rs 20,000 is purchased at the end of an accounting period and its realisable value is Rs 30,000, then the closing stock will be valued at Rs 20,000 not at Rs 30,000.
Treatment of closing stock : If closing stock is given in the adjustment, then there will be two postings.
If closing stock is given in the trial balance, then it needs to be shown only in the assets side of the Balance Sheet.
Question.3 : Write short notes on
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
(a) Outstanding Expenses: These refer to those expenses which belong to and are
incurred in the current accounting period but are left unpaid. In other words, we can say
that the services in exchange of these payments have been realised but the payments
are not made. For example, if Rs 1000 wages are outstanding, then this means that
labour worth Rs 1,000 has been used but has not been paid for till the end of the year.
(b) Prepaid Expenses: These refer to those expenses for which the benefits have not
been realised but the payments have already been made in advance. These are
basically the advance payments for the next year, which are made in the current
Example: Prepaid insurance premium of Rs 1,000 means that the payment of Rs 1,000
is made in advance for the next accounting period.
(c) Income Received in Advance: This refers to the income received whose actual
realisation of benefits will occur in the next accounting period. These are also called
Example: Commission of Rs 1,200 for the year 2011-12 is received in 2010-11. This commission does not belong to the current year as it is related with the work to be done in the next accounting year i.e., 2011-12.
(d) Accrued Income: This refers to those incomes which have been earned during an
accounting period but have not been actually realised in the current period. These are
also called earned incomes.
Question.4 : Give the performa of income statement and balance in vertical form.
Income statement for the period ended ….
Question.5 : Why is it necessary to create a provision for doubtful-debts at the time of preparation of final accounts?
The provision for doubtful-debts is created with the motive of minimising the effect of actual loss caused by the bad-debts. The actual figure of the current year's bad-debts will be known in the next year with the realisation of debtors. At that point of time, it will be known as to how many of the debtors have become bad. Thus, instead of waiting for the realisation of debtors, we create a provision for doubtful-debts in order to cover the expected future loss associated with the debtors becoming bad.
Question.6 : What adjusting entries would you record for the following?
(b) Discount on debtors
(c) Interest on capital
(d) Manager's commission
(d) Manager’s commission
There are two cases in manager’s commission.
Case 1: Manager’s commission based on profits before charging the manager’s commission.
Case 2: Manager’s commission based on profits after charging the manager’s commission.
Question.7 : What do you mean by provision for discount on debtors?
Answer : The discount is allowed to those debtors who are ready to pay a huge amount in one shot. It is given in order to encourage them to repay the debt. The provision for discount on debtors is created on good debtors. The amount of good debtors is calculated by deducting the amount of Bad Debts, further Bad Debts and new provision for Doubtful Debts. The required percentage of the good debtors is calculated and the provision for
discount on debtors is deducted from the Debtors' amount in the Assets side of a Balance Sheet. As it is a loss for the business, it is shown in the Debit side of the Profit and Loss Account.
Question.8 : Give the journal entries for the following adjustments:
(a) Outstanding salary at Rs 3,500.
(b) Rent unpaid for one month at Rs 6,000 per annum.
(c) Insurance prepaid for a quarter at Rs 16,000 per annum.
(d) Purchase of furniture costing Rs 7,000 entered in the purchases book.
Page No 435:
Question 1: What are adjusting entries? Why are they necessary for preparing the final accounts?
ANSWER: Adjusting entries are the entries of those adjustments which are given outside the trial balance and which help us reflect the true financial position i.e., profit or loss of an organisation. According to the double-entry system, all the adjustments given outside the Trial Balance are posted at two places. The adjusting entries are necessary they enable us to post and take into account those items which are omitted or entered with the wrong amount and/or recorded under wrong heads.
The treatment of adjusting entries is necessary.
(i) It helps us assess the true financial position of an organisation based on accrual basis of accounting.
(ii) It helps us know the actual figure of profit or loss.
(iii) It records the omitted entries and rectifies the errors made.
(iv) It helps in providing depreciation and making different provisions, such as Bad Debts and depreciation.
Question 2: What is meant by provision for doubtful-debts? How are the relevant accounts prepared and what journal entries are recorded in the final accounts? How is the amount for provision for doubtful-debts calculated?
ANSWER: The provision for doubtful-debts is provided after deducting the amount of bad-debts from the debtors. The provision for doubtful-debts is provided because of the rationale that the actual amount of bad-debts will only be known in the next year, when the amount of debtors will get realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus, in order to bridge-up the expected future loss, we create a provision for doubtful-debts.
For the provision for doubtful-debts, we prepare debtors account and provision for doubtful-debts account. For recording bad-debts, the following journal entry is passed.
Example: An extract from a Trial Balance as on December 31, 2010.
(i) Further bad-debts amount to Rs 500.
(ii) Create a provision for doubtful-debts at 5% on debtors.
The provision for Doubtful Debt as on January 01, 2010 was Rs 1,000 and the Bad Debts during the year were Rs 1,500. In addition to this, there was a further Bad Debt of Rs 500 which was known at the end of the year i.e., December 31, 2010. Now we need to create a provision for Doubtful Debts at 5% on debtors.
The amount of provision for Doubtful Debts is calculated by debiting the amount of further Bad Debts from debtors and calculating the given percentage of provision on remaining debtors. This provision is added to the Bad Debts amount in the profit and loss account and deducted from debtors in the assets side of a Balance Sheet.
Question.3 : Show the treatment of prepaid expenses, depreciation and closing stock at the time of preparation of final accounts when:
(a) When given inside the Trial Balance?
(b) When given outside the Trial Balance?
(i) Prepaid expenses
(a) When given inside the Trial Balance: It will be posted only in the Assets side of
the Balance Sheet.
(b) When given outside the Trial Balance:
(a) If depreciation is given inside the Trial Balance, then it can be shown in the Debit
side of the Profit and Loss A/c. It means that this depreciation amount has already been
deducted from the concerned assets in the Balance Sheet.
(b) If depreciation is given outside the Trial Balance, i.e. in the adjustments, then it is shown in the debit side of the Profit and Loss Account and deducted from the concerned assets in the Assets side of Balance Sheet.
(iii) Closing stock
(a) The closing stock is valued at cost price or realisable value, whichever of the two is lesser. If given inside the Trial Balance, then it will be posted only in the Assets side of the Balance Sheet.
(b) If the closing stock is given outside the Trial Balance then, it needs to be posted at two places.
Question.1 : Prepare a trading and profit and loss account for the year ending December 31, 2017. from the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year.
1. Commission received in advance Rs 1,000.
2. Rent receivable Rs 2,000.
3. Salary outstanding Rs 1,000 and insurance prepaid Rs 800.
4. Further bad debts Rs 1,000 and provision for doubtful debts @ 5% on debtors and discount on debtors @ 2%.
5. Closing stock Rs 32,000.
6. Depreciation on building @ 6% p.a.
Answer : Books of M/s. Rahul Sons.
Trading Account for the year ending December 31, 2017
Profit and Loss Account for the year ending December 31, 2017
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Question.2 : Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending December 31, 2017. from the following figures taken from his trial balance :
1. Depreciation charged on machinery @ 5% p.a.
2. Further bad debts Rs 1,500, discount on debtors @ 5% and make a provision on debtors @ 6%.
3. Wages prepaid Rs 1,000.
4. Interest on investment @ 5% p.a.
5. Closing stock 10,000.
Profit and Loss Account for the year ending March 31, 2017