NCERT Solution: Financial Statements - II - Commerce PDF Download

Short Question Answers

Q1: Why is it necessary to record the adjusting entries in the preparation of final accounts?
Ans: Adjusting entries are necessary in preparation of final accounts because: 

• It gives the true and fair view of the performance of the business in that current year. 
• It eliminates prior year or coming year’s entries thereby giving the financial result of the current year. 
• If any entries are omitted or left without recording they are passed as adjusting entries in the year end 
• After going through all the accounts, provision is created in the year end wherever necessary.

Q2: What is meant by closing stock? Show its treatment in final accounts?
Ans: The closing stock is referred to as the goods which remains unsold at the end of an accounting year. It is evaluated at the price of its cost or its realizable value whichever is lower. For example: if cost of goods unsold is Rs.5000 and net realizable value is Rs.45000, then the closing stock is valued at Rs.4500.
The treatment of the closing stock is done in the final accounts in the following manner:

• In the case when the closing stock appears in the Trial Balance then it shown as asset in the Balance Sheet. 
• In the case when the closing stock appears as an adjustment then it is shown on the credit side of the Trading account and at the side of the asset in the balance sheet.

Q3: State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
Ans: 
(a) Outstanding expenses: The outstanding expenses are referred to as the payments which are due on behalf of organization for the accrued expenses or for the services which have been already received. They pertain to the present year of the organization but remain unpaid till the end of the year. These are shown in the liability side of the balance sheet. 
(b) Prepaid expenses: These are the types of payment which is made by the business even before when they are due. The example of such payment can be the payments of the Insurance whose policies are paid in the middle of the year and whose services can be availed for the entire year. These are shown as asset in the balance sheet.
(c) Income received in advance: These are incomes which are received prior before when they are realized. For example when the organization receives the payment in advance for the sales of goods by the purchaser. Hence they can be called as the receipts which are received before the period of their realization. These are considered to be the liability for the business as the business is liable to pay its services. 
(d) Accrued income: These are the incomes which are not realized yet accrued. These are considered to be the asset for any business organization. The example of the same can be the promise of the payment to the business by the purchaser for the payment of the services made by the organization to benefit the purchaser.

Q4: Give the Performa of income statement and balance in vertical form.
Ans: 
Performa Income Statement 
Income statement for the year ending 

Balance sheet as on......

Q5: Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?
Ans: The creation of the provision of doubtful debt is made in order to make the prediction of the bad or doubtful debt by the business when the accurate position for the same can be made or determine in the next year only. It is considered to be the prudent practice for any business organization as it reduces the scope of actual loss by the business.

Q6: What adjusting entries would you record for the following :
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager’s commission
Ans: 
(a) Depreciation :

• Shown in debit of profit and loss account 
• Shown as deduction from asset in Balance sheet.

Profit & Loss Account  for the year ended 31.03.2017
Balance Sheet as on 31.03.17
(b) Discount on debtors : 

• Shown in debit of profit and loss account 
• Shown as deduction from debtors in Balance sheet.

Profit & Loss Account  for the year ended 31.03.2017

Balance Sheet  as on 31.03.17

(c) Interest on Capital:

• Shown in debit of profit and loss account 
• Shown as addition to Capital in Balance sheet.

Profit & Loss Account  for the year ended 31.03.2017
Balance Sheet as on 31.03.17

(d) Manager’s commission: 

• Shown in debit of profit and loss account 
• Shown as Outstanding liability in Balance sheet.

Profit & Loss Account  for the year ended 31.03.2017

Balance Sheet  as on 31.03.17

Q7: What is meant by provision for discount on debtors?
Ans: The maintenance of the provision for discount on debtors is done in order to encourage the payment from the debtors of the business before the date which is due. The discount is hence made to encourage the timely payment by the debtors especially the ones who have a bad record for doing so. This provision is maintained in the side of the debit of the profit and the loss account and is shown as the deduction from the debtors on the side of the assets in the balance sheet. 

Q8: Give the journal entries for the following adjustments :
(a) Outstanding salary ` 3,500.
(b) Rent unpaid for one month at ` 6,000 per annum.
(c) Insurance prepaid for a quarter at ` 16,000 per annum.
(d) Purchase of furniture costing ` 7,000 entered in the purchases book.
Ans: 

Long Question Answers

Q1: What are adjusting entries? Why are they necessary for preparing final accounts?
Ans: The adjusting entries are considered to be the entries which are made in the end of the accounting period to determine the true and the fair position of the business. These are called as the adjusting entries as they are made out of the items in the trial balance. The adjustments are made in the two places as per the adherence o the double entry system if book keeping.
It is necessary to make the adjusting entries while preparing the final accounts as: 

• It depicts the true and fair position and the performance of the business of the current year. 
• It eliminates the entries which were already made in the prior year or which have to be made in the forthcoming years. 
• In case of the omission of any entries while the process of recording, the adjusting entries for the same are passed in the end of the accounting period. 
• After going through all the accounts, provision is created in the year end wherever necessary.

Q2: What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?
Ans: The maintenance of the provision for discount on debtors is done in order to encourage the payment from the debtors of the business before the date which is due. The discount is hence made to encourage the timely payment by the debtors especially the ones who have a bad record for doing so. It is considered to be the prudent practice for any business organization as it reduces the scope of actual loss by the business.
Whenever the provision for bad debts is made, the bad debts which arise after the provision is made shall be adjusted firstly against the provision so made and not the debtors. 
For example: The trial Balance of a company is extracted as follows
Adjustment: 
(i) Further Bad debt amounting to Rs.400 
(ii) Create a provision for doubtful debts @ 8% on debtors.
In the above example the Bad debts is Rs.1000 and further Bad debts Rs.400 is known at the year end. Provision for doubtful debts is created after deducting the further bad debts from the debtors. It is shown as addition to Bad debts in Profit & Loss account and as a deduction from debtors. It is illustrated below:
Profit & Loss Account  for the year ended 31.03.2017
Balance Sheet as on 31.03.17

Q3: Show the treatment of prepaid expenses depreciation, 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?
Ans: 
Prepaid expense:
(a) When given in Trial Balance: Will be shown in asset side of balance sheet.

(b) When given Outside trail balance: 

• Will be shown as deduction from particular expense in Profit and loss account and 
• Will be shown in asset side of Balance sheet 

Profit & Loss Account  for the year ended 31.03.2017

Balance sheet as on 31.03.2017

Depreciation:

(a) If already in Trail Balance: Then depreciation is shown in Debit side of Profit and loss account. The asset figure in Trail balance will be after depreciation. 
(b) If outside the trial balance : 

• Shown in debit of profit and loss account 
• Shown as deduction from asset in Balance sheet.

Profit & Loss Account  for the year ended 31.03.2017

Closing stock:
(a) If given in Trail Balance: It will be shown only in asset side of balance sheet. The Purchases would be already adjusted for closing stock in Profit & loss account. Hence closing stock will not be shown in Trading and Profit and loss account. 
(b) If given outside Trial Balance: 

• It will be shown in credit side of Trading Account
• And shown in asset side of the Balance sheet.

Trading Account  for the year ended 31.03.2017
Balance Sheet as on 31.03.17

Numerical Question Answers

Q1: Prepare a trading and profit and loss account for the year ending March 31, 2017. from the balances extracted of M/s Rahul Sons.  Also prepare a balance sheet at the end of the year.

Adjustments 
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.
Ans: 
Books of M/s. Rahul Sons.

Q2: Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending March 31, 2017. from the following figures taken from his trial balance :

Adjustments 
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.
Ans: 
Books of M/s. Green Club Ltd