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Final Accounts with Adjustments | Problem and Solution | P9

Arjun EP

Published on: July 5, 2020

Preparation of Final Accounts

Final accounts are also known as financial statements.

These statements are prepared to know about operating results and overall financial position to the company.

Joint Stock Company needs to prepare its final account at the end of every financial year.

Generally, final accounts of a manufacturing company involve the following statements:

(1) Manufacturing account

(2) Trading account

(3) Profit and loss account

(4) Profit and loss appropriation account

(5) Balance sheet

According to Company Act, annual financial statement should be prepared by the board of directors of a public limited company every year at least thirty (30) days prior to the holding of its annual general meeting.

In the case of private limited company, within the six months of the expiry of its financial year.

According to company act, financial statement involves the following statements:

(a) Balance sheet as at the last date of the accounting or financial year.

(b) Profit and loss account of the accounting or financial year.

Meaning of Final Accounts

Final account is prepared by every business organization at the end of accounting period.

Trading account is prepared to determine gross profit or gross loss of the company.

Profit and loss account is prepared to find out net profit or net loss of the business activities of the company.

Balance sheet is prepared to find out financial position of the organization.

Final Accounts with Adjustments

Prepaid expired	Prepaid (by name) expired A/c	Dr	Deduct from asset in B/S
	To Prepaid (by name) account		Show in debit side of trading or P&L account
Depreciation on asset	Depreciation account	Dr	Show in debit side of profit and loss account
	To Asset (by name) A/c		Deducted from related asset in B/S
Outstanding expenses	Related expenses account	Dr	Added with related expenses in trading/P&L A/c
	To O/s related expenses A/c		Show in liabilities side of B/S
Accrued income	Accrued income account	Dr	Added with related income in trading or P&L A/c
	To Related income A/c		Show in assets side of B/S
Commission to	Manager’s commission account	Dr	Show in debit side of profit and loss account
manager	To Outstanding M’s commission		Show in liabilities side of B/S
New bad debts	Bad debts account	Dr	Show in debit side of profit and loss account
	To Debtors account		Deducted from debtors in B/S
Provision for bad debts	Provisions for bad debts account	Dr	Show in debit side of profit and loss account
	To Debtors account		Deducted from debtors in B/S
Unearned or	Related income account	Dr	Deducted from related income in trading/P&L A/c
advance income	To Unearned income A/c		Show in liabilities side of B/S
Goods distributed	Advertisement account	Dr	Deduct from purchase of goods
for free sample	To Purchase account		Show in debit side of profit and loss account
Goods lost by fire and	Insurance claim account	Dr	Show insurance claim in assets side of B/S
insurance claim	P&L account (loss)	Dr	Debit loss in profit and loss account
	To Purchase account		Deduct full amount from purchase of goods
Interest on capital	Interest on capital account	Dr	Show in debit side of profit and loss account
	To Capital account		Added with capital in B/S

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 9A

KK Audit From has following Trial Balance on 31^st December 20XX:

Account heads	Amount Dr	Amount Cr
Cash	38,000
Legal expenses	36,000
Cash at bank	28,500
Office building	8,60,000
Accumulated Depⁿ: office building		2,06,500
Office equipment	4,35,000
Accumulated Depⁿ: office equipment		1,06,000
Sundry income		58,500
Bills receivable	4,44,500
Capital		14,17,500
Withdrawals	2,20,000
Professional fees (service revenue)		11,28,000
Salary expenses	5,09,500
Travel expenses	1,13,500
Office rent paid	95,000
8% Investment	70,000
Prepaid insurance	31,000
Internet and telephone expenses	7,000
Stock of office materials (31 Dec)	12,500
Miscellaneous expenses	16,000
Total	29,16,500	29,16,500

Additional information:

(a) One-half of the prepaid insurance has expired.

(b) Depreciation on building and equipment amount to $35,000 and $26,000 respectively.

(d) Accrued sundry income $2,400.

(e) Manager is entitled 5% commission before charging net profit

Required: (1) Profit and loss account; (2) Balance sheet

Net profit = $327,500; Balance sheet = $19,12,000]

* Manager’s commission = (Cr 11,94,500 – Dr 867,000 ) x 5/100 = $16,375

SOLUTION:

Profit and Loss Account

KK Audit Form

As on 31^st December 20XX

Particulars		Amount	Particulars		Amount
To Salary	509,500		By Service revenue		11,28,000
Add: Outstanding	13,500	5,23,000	By Sundry income	58,500
To Legal expenses		36,000	Add: Accrued	2,400	60,900
To Travel expenses		1,13,500	By Interest on investment	Nil
To Office rent		95,000	Add: Accrued interest	+ 5,600	5,600
To Prepaid insurance expired		15,500
To Internet and telephone		7,000
To Miscellaneous expenses		16,000
To Accumulated depn on:
Building	35,000
Equipment	26,000	61,000
To Manager’s commission due		16,375
To Net profit		3,11,125
		11,94,500			11,94,500

Cr 11,94,500 – Dr 867,000 = 327,500

Manager’s commission = 327,500 x 5/100 = $16,375

NP = 327,500 – 16,375 = 311,125

Balance Sheet

KK Audit Form

For the year ended 31^st December 20XX

Liabilities + capital +profit		Amount	Assets		Amount
Capital	14,17,500		Cash in hand		38,000
Add: Net profit	3,11,125		Cash at bank		28,500
Less: Drawings	(2,20,000)	15,08,625	Office building		8,60,000
Accumulated depn on build.			Office equipment		4,35,000
(206,500 + 35,000)		2,41,500	Bills receivable		4,44,500
Accumulated depn on equip.			8% Investment	70,000
(106,000 + 26,000)		1,32,000	Add: Accrued interest	5,600	75,600
Outstanding salary		13,500	Prepaid insurance	31,000
Manager’s commission due		16,375	Less: Expired	(15,500)	15,500
			Accrued sundry income		2,400
			Stock of office materials		12,500
		19,12,000			19,12,000

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 9B

The following unadjusted trial balance was given by KK Suppliers on 31^st December 2021:

Name of ledgers	Amount Dr	Amount Cr
10% Investments	45,000	–
10% Bank loan	–	6,00,000
Bad debts	4,500	–
Drawings and capital	5,70,000	24,00,000
Debtors and creditors	90,000	60,000
Provision for bad debts	–	4,500
Cash in hand	8,300	–
Bank balance	7,500	−
Purchase and sales	14,40,000	25,20,000
Opening inventory	96,000	–
Sales return	15,000	–
Freight inward	6,000	–
Discount	8,000	4,000
Land	28,00,000	–
Equipment	3,00,000	–
Accumulated depreciation on equipment	–	90,000
Office salaries paid	68,200	–
Insurance	18,000	–
Wages and salary paid	2,50,000	–
Commission	30,000	90,000
Interest	15,000	3,000
Total	57,71,500	57,71,500

Additional information:

(a) Further bad debts write off $2,000 and make a provision for bad debts 5%.

(b) Closing Inventory was valued at $80,000.

(d) Equipment was to be depreciated @ 10% p.a. on original cost at straight line method.

(e) Monthly salary of office was $6,200

(f) Goods worth $3,000 were distributed as samples

(g) Insurance was prepaid to the extent of $6,000.

(h) A valuator appreciated land by $140,000.

(i) Goods worth $75,000 were destroyed by fire and Insurance Company admitted full claim.

Required: Trading account; profit and loss account and balance sheet

[Answer: GP = $871,000; NP = $871,000; Balance sheet = $35,46,900]

SOLUTION:

Trading Account

KK Suppliers

As on 31^st December 2021

Particulars		Amount	Particulars		Amount
To Opening inventory		96,000	By Sales	25,20,000
To Purchase	14,40,000		Less: Return	(15,000)	25,05,000
Less: Return	Nil		By Closing inventory		80,000
Less: Free sample	(3,000)
Less: Loss by fire	(75,000)	13,62,000
To Freight inward		6,000
To Wages and salary paid		2,50,000
To Gross profit c/d		8,71,000
		25,85,000			25,85,000

Cr 25,85,000 – Dr 17,14,000 = 871,000 GP

Profit and Loss Account

Particulars		Amount	Particulars		Amount
To Office salaries	68,200		By Gross profit b/d		8,71,000
Add: Salary payable	+ 6,200	74,400	By Interest received	3,000
To Interest on loan	15,000
Add: Outstanding	+ 45,000	60,000	Add: Accrued	+ 1,500	4,500
To Bad debts	4,500		By Discount received		4,000
Add: New bad debts	2,000		By Appreciation on land		1,40,000
Add: PBD	4,400		By Commission received	90,000
Less: PBD, old	(4,500)	6,400	Less: Advance	(3,000)	87,000
To Free sample (advertisement)		3,000
To Loss by fire		Nil
To Discount allowed		8,000
To Depⁿ on equipment		30,000
To Insurance	18,000
Less: Prepaid	(6,000)	12,000
To Commission allowed		30,000
To Net profit		882,700
		11,06,500			11,06,500

Cr 11,06,500 – Dr 223,800 = 882,700 NP

Balance Sheet

KK Suppliers

As on 31^st December 2021

Liabilities + capital + profit		Amount	Assets		Amount
Capital	24,00,000		Cash in hand		8,300
Add: Net profit	8,82,500		Cash at bank		7,500
Less: Drawings	(5,70,000)	27,12,500	10% Investment	45,000
10% Bank loan	600,000		Add: Accrued interest	+ 1,500	46,500
Add: O/s interest	+ 45,000	6,45,000	Debtors	90,000
Creditors		60,000	Less: Bad debts	(2,000)
Accumulated depn on equipment				88,000
(90,000 + 30,000)		1,20,000	Less: PBD 5%	(4,400)	83,600
Advance commission		3,000	Land	28,00,000
Salary payable		6,200	Add: Appn 5%	+ 1,40,000	29,40,000
			Equipment (at cost)		3,00,000
			Insurance claim		75,000
			Prepaid insurance		6,000
			Closing inventory		80,000
		35,46,700			35,46,900

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Problems and Answers of Final Accounts

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 9A

The following is the trial balance of EP Online Study for the year ended 31 December 2021:

Debit balance	Amount Dr	Credit balance	Amount Cr
Fixed assets	350,000	Capital	200,000
Account receivable	88,000	Commission received	9,000
Cash in hand	1,850	Service revenue	307,000
Interest paid	3,650	10% Bank loan	60,000
Investment	25,000	Account payable	25,000
Office supplies	1,200	Provision for doubtful debts	3,000
Bad debts	2,650	Accumulated depreciation on fixed assets	70,000
Office salaries paid	90,000
Advance insurance	1,000
Audit fees	11,325
Legal charge	1,675
Office rent paid	82,500
Telephone and internet expenses	2,150
Drawing	13,000
	674,000		674,000

Additional information:

(a) Commission received includes advance commission of $1,750.

(b) Monthly office salaries is $10,000 per month

(d) Fixed assets is depreciated by 20% p.a. on SLM

(e) Office supplies in hand $350

(f) Provide interest on capital @ 5%

Required: Profit and loss account and balance sheet

[Answer: Net profit = $900; Balance sheet = $462,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 9B

The following is the trial balance of AM Trading Concern for the year ended 31 December 2021:

Debit balance	Amount	Credit balance	Amount
Equipment	100,000	Sales revenue	275,000
Cash and bank balance	7,750	Discount on purchases	1,200
Sundry debtors	110,500	Provision for bad debts	1,500
Inventories (31 December)	28,800	Capital	115,000
Salaries and wages	9,600	Sundry creditors	10,500
Custom duty	1,500	8% Bank loan	12,500
Purchase	136,000	Accumulated depreciation on equipment	15,000
Returns inward	300	Interest on investment	640
Income tax paid	1,660
Discount on sales	1,500
Repairs expense	480
Bad debts	1,500
Rent paid	10,800
Interest on loan	650
Drawings	1,500
10% Investment	15,000
Advances salary paid	3,800
	431,340		431,340