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Final Accounts with Adjustments | Problem and Solution | P7

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

Adjustment entry	Journal entry		Effects on
Closing stock	Closing stock account	Dr	Show in credit side of trading account
	To Trading account		Show in assets side of 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
Prepaid expenses	Prepaid expenses account	Dr	Deducted from related expenses in trading/P&L A/c
	To Related prepaid exp A/c		Show in assets 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
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
Create reserve	P&L or P&L Appn account	Dr	Show in debit side of P&L or P&L Appn A/c
	To Reserve fund account		Show in liabilities side of B/S
Prepaid exp. expired	Prepaid expense expired A/c	Dr
	To Prepaid expense (by name)
Unearned income earned	Unearned income (by name) A/c	Dr	Deducted from related advance income in B/S
	To Income earned (by name)		Show in credit side of profit and loss account

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Accounting Equation	http://tiny.cc/c89jkz
Basic Journal Entries in Nepali	http://tiny.cc/uaakkz
Basic Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
Trial Balance & Adjusted Trial Balance	http://tiny.cc/c59jkz
Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
Final Accounts: Class 11	http://tiny.cc/y89jkz
Adjustment in Final Accounts	http://tiny.cc/keakkz
Capital and Revenue	http://tiny.cc/peakkz
Single Entry System	http://tiny.cc/n19jkz
Non-Trading Concern	http://tiny.cc/j09jkz
Government Accounting	http://tiny.cc/hcakkz
Goswara Voucher (Journal Voucher)	http://tiny.cc/hcakkz

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

PROBLEM: 7A

ABC Company has following trial balance year ended 31^st December Current Year:

Particulars	Amount Dr	Particulars	Amount Cr
Trade debtors	2,20,000	Provision for bad debts	5,000
Bills receivable	30,000	Capital	6,50,000
Opening stock (inventory)	1,80,000	Discount received	500
Plant and machinery	1,00,000	General reserve	32,000
Wages paid	50,000	Bills payable	65,000
Office salaries	2,00,000	Trade creditor	46,000
Land and building	5,25,000	Bank loan	1,90,000
Bad debts	5,000	Sales (net)	15,00,000
Trade expenses	2,500	Bank overdraft	35,000
Prepaid insurance	1,000	Outstanding rent	25,000
Cash in hand	22,000	Assets replacement fund	1,25,000
Goodwill	178,000
10% Investments (1 July)	50,000
Purchases (net)	10,00,000
Furniture	90,000
Interest paid	20,000
	26,73,500		26,73,500

Additional information:

a. Stock (inventory) at end $3,50,000.

b. Bad debts $2,000 and create provision for bad debts @ 5% on trade debtors.

c. Outstanding wages $40,000.

d. Prepaid salary $20,000.

e. Depreciate plant and machinery @10%.

f. Transfer to general reserve $75,000.

Required: (1) Trading account; (2) Profit and loss account; (3) Balance sheet

[Answer: Gross profit = $580,000; Net profit = $282,600; Balance sheet = $15,65,600]

SOLUTION:

Trading Account

ABC Company
As on 31^st December 20XX

Particulars		Amount	Particulars		Amount
To Opening stock		1,80,000	By Sales	15,00,000
To Purchase	10,00,000		Less: Return	Nil	15,00,000
Less: Return	Nil	10,00,000	By Closing stock		3,50,000
To Wages	50,000
Add: Outstanding	+40,000	90,000
To Gross profit c/d		5,80,000
		18,50,000			18,50,000

Cr 18,50,000 – Dr 12,70,000 = 580,000 GP

Profit and Loss Account

ABC Company
As on 31^st December 20XX

Particulars		Amount	Particulars	Amount
To Office salaries	200,000		by Gross profit b/d	5,80,000
Less: Prepaid	(20,000)	1,80,000	by Discount received	500
To Bad debts, old	5,000		by Interest receivable (50,000 @ 10% x 6/12)	2,500
Add: Bad debts, new	2,000
Add: PBD, new	10,900
Less: PBD, old	(5,000)	12,900
To Trade expenses		2,500
To Depreciation on P&M		10,000
To Interest paid		20,000
To General reserve		75,000
To Net profit c/d		2,82,600
		5,83,000		5,83,000

Cr 583,000 – Dr 300,400 = 282,600 NP

Balance Sheet

ABC Company
As on 31^st December 20XX

Liabilities + capital +profit		Amount	Assets		Amount
Capital	650,000		Cash in hand		22,000
Add: Net profit	282,600		Goodwill		178,000
Less: Drawings	Nil	9,32,600	Plant and machinery	100,000
General reserve	32,000		Less: Depreciation	(10,000)	90,000
Add: New reserve	75,000	1,07,000	Land and building		5,25,000
Bills payable		65,000	Furniture		90,000
Trade creditors		46,000	10% Investment	50,000
Bank loan		1,90,000	Add: Interest receivable	+ 2,500	52,500
Bank overdraft		35,000	Trade debtors	220,000
Outstanding rent		25,000	Less: bad debts	(2,000)
Assets replacement fund		1,25,000		218,000
Outstanding wages		40,000	Less: PBD 5%	(10,900)	2,07,100
			Closing stock		3,50,000
			Bills receivable		30,000
			Prepaid salary		20,000
			Prepaid insurance		1,000
		15,65,600			15,65,600

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

PROBLEM: 7B

BL Trading Company has following trial balance on 31 December 2021:

Accounts balances	Dr Amount	Cr Amount
Capital		25,00,000
Opening stock (inventory)	1,74,400
Carriage inward	42,400
Return inward	25,500
Return to suppliers		17,500
Deposit with suppliers	1,18,300
Carriage on sales	37,000
Rent outstanding		25,000
Loan to Max Company	1,00,000
Stationery expense	5,000
Creditors		130,000
Purchases	51,30,000
Sales		88,80,000
Provision for bad debts		15,000
Debtors	5,60,000
Goodwill	1,25,000
Advertisement	49,500
Bad debts	14,000
Cash at bank	2,20,600
Discount allowed	23,300
Wages	1,17,500
Salary to staff	12,50,000
Plant and machinery	5,78,000
Prepaid insurance	12,000
Goodwill written off	12,500
Land and building	30,92,500
General reserve		1,25,000
Tax paid	40,000
Cash in hand	75,000
Sundry incomes		110,000
	1,18,02,500	1,18,02,500

Additional information:

Closing stock (inventory) at the end $530,000.

Write off further bad debts of $25,000.

Depreciate plant by 15% and land and building by $92,500.

Prepaid insurance expired to the extent of $11,000.

Transfer to general reserve $75,000.

Required: (a) Trading account; (b) Profit and loss account; (c) Balance sheet

[Answer: GP = $39,37,700; NP = $23,41,200; Balance sheet = $51,96,200]

SOLUTION:

Trading Account

BL Trading Company

As on 31 December 2021

Particulars		Amount	Particulars		Amount
To Opening stock		1,74,400	By Sales	88,80,000
To Purchase	51,30,000		Less: Return inward	(25,500)	88,54,500
Less: Return	(17,500)	51,12,500	By Closing stock		5,30,000
To Carriage inward		42,400
To Wages		1,17,500
To Gross Profit c/d		39,37,700
		93,84,500			93,84,500

Cr 93,84,500 – Dr 56,46,800 = 39,37,700 GP

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Salary to staff		12,50,000	By Gross Profit b/d	39,37,700
To Carriage on sales		37,000	By Sundry incomes	1,10,000
To Stationery		5,000
To Advertisement		49,500
To Bad debts	14,000
Add: Bad debts	25,000
Less: PBD old	(15,000)	24,000
To Discount allowed		23,300
To Goodwill written off		12,500
To Depreciation on:
Plant and machinery	86,700
Land and building	92,500	1,79,200
To Tax paid		40,000
To Prepaid ins. expired		11,000
To General reserve		75,000
To Net profit c/d		23,41,200
		40,47,700		40,47,700

Cr 40,47,700 – Dr 17,06,500 = 23,41,200 NP

Balance Sheet

BL Trading Company

As on 31 December 2021

Liabilities + capital +profit		Amount	Assets		Amount
Capital	25,00,000		Cash in hand		75,000
Add: Profit	23,41,200	48,41,200	Cash at bank		2,20,600
General reserve	125,000		Goodwill		1,25,000
Add: New reserve	75,000	2,00,000	Plant and machinery	578,000
Creditors		1,30,000	Less: Depn 15%	(86,700)	4,91,300
Outstanding rent		25,000	Land and building	30,92,500
			Less: Depn	(92,500)	30,00,000
			Debtors	560,000
			Less: Bad debts	(25,000)	5,35,000
			Closing stock		5,30,000
			Deposit with suppliers		1,18,300
			Loan to Max Company		1,00,000
			Prepaid insurance	12,000
			Less Expired insurance	(11,000)	1,000
		51,96,200			51,96,200

#####

Problems and Answers of Final Accounts

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

PROBLEM: 7A

Following trial balance and additional information are provided by ABC Traders on 31 December:

Particulars	Amount Dr	Particulars	Amount Dr
Purchases	310,000	Sales	415,000
Opening stock	50,000	Capital	200,000
Cash at bank	12,000	Rent and commission income	8,500
Drawing	4,000	Creditors	25,000
Salaries and wages	63,500	Bills payable	15,000
Commission	35,000	Outstanding expenses	11,000
Advertisement	17,000	Loan from bank	80,000
Printing and stationery	5,000
General expenses	14,000
Cash in hand	24,000
Prepaid rent and insurance	14,000
Furniture	22,000
Machinery	70,000
Discount	4,000
Carriage inward	10,000
Debtors	100,000
	754,500		754,500

Additional information:

(a) Closing stock at the end of December was valued at $1,64,000.

(b) Depreciate furniture by 10% and machinery by 5%.

(d) Write off $5,000 bad debts and maintained reserve for doubtful debt at the rate 2% on debtor.

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

[Answer: Gross profit = $209,000; Net profit = $55,400; Balance sheet = $382,400]

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

PROBLEM: 7B

The trial balance of Khan Traders, of Mr Khan, at the end of December is as under:

Particulars	Amount Dr	Particulars	Amount Cr
Opening stock	30,000	Khan’s capital	1,50,000
Plant and machinery	80,000	Bank loan	50,000
Furniture	40,000	Sundry creditors	40,000
Book debt	80,000	Sales	3,00,000
Cash at bank	26,000	Purchase returned	10,000
Purchases	2,00,000	Reserve for bad debts	2,000
Wages and direct expenses	30,000	Discount and commission	3,000
Carriage inwards	5,000
Office salaries	25,000
Bad debts	500
General expenses	1,500
Insurance for business	2,000
Office rent	20,000
Khan’s drawings	15,000
	555,000		555,000

Additional information:

(a) Plant and machinery and furniture are to be depreciated by 10% each.

(b) Reserve for doubtful debts is to be maintained at 5%.

(d) Closing stock was valued at $40,000.

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

[Answer: Gross profit = $85,000; Net profit = $20,000; Balance sheet = $250,000]

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

PROBLEM: 7C

Following trial balance of AF Trading Concern for the year ending 31^st December 2019 is given.

Debit Items	Amount Dr	Credit Items	Amount Cr
Land and Building	15,000	Unearned commission	2,000
Goodwill	10,000	Overdraft	12,000
Drawing	5,000	Reserve of doubtful debts	1,000
Freight on sales	500	Creditors	13,000
Closing stock	7,000	Purchase return	1,500
Discount allowed	500	Sales	90,000
Cash at bank	2,200	Capital	45,000
Bad debts	500
Plant and machinery	42,000
Rent, rates and insurance	900
Debtors	10,000
Salaries	7,400
Wages	3,000
Sales return	500
Purchases	48,000
Opening stock	12,000
	164,500		164,500