Chapter 1: Introduction to Partnership and Partnership Final Accounts Practise Problem | Q: 5 | Page no. 58 Sucheta & Gayatri are Partners sharing Profit and Loss in the ratio 3:2

Chapter 1: Introduction to Partnership and Partnership Final Accounts

Practise Problem | Q: 5 | Page no. 58

Sucheta & Gayatri are Partners sharing Profit and Loss in the ratio 3:2. From the following Trial Balance and additional information, you are required to prepare Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as on that date.

Trial Balance as on 31st March 2019

Particulars Debit Credit
Purchases & Sales 65,000 1,85,500
Works Manager's Salary 2,300
Capital - Sucheta 75,000
Gayatri 40,000
Opening Stock 18,700
Debtors & Creditors 47,500 35,000
Wages & Salaries 4,000
Bills Receivable 22,000
Bills Payable 27,300
Discount 400
Motive Power 1,350
Custom duty 1,500
Interest 1,300
Unproductive Wages 3,000
Audit fees 2,500
Rent 1,800
Conveyance 2,000
Goodwill 25,000
Copyrights 20,000
Building 88,000
Partner (Sucheta's) Loan 6,150
Investments 40,000
Cash at Bank 26,000
Total 3,70,650 3,70,650

Adjustments:

  1. Stock on 31st March 2019 was valued at 19,700.
  2. Goods costing 3,000 distributed as a free sample.
  3. Motive Power includes 500 paid for the deposit of Power Meter.
  4. Depreciate Building @ 5%.
  5. Write off 2,000 for Bad debts and maintain R.D.D at 3% on Debtors.
  6. Bills Receivable included dishonored of Bill of 4,000.

Solution:

In the books of Sucheta and Gayatri
Trading and Profit and Loss Account for the year ended on 31st March 2019

Dr. Particulars Amount Amount Cr. Particulars Amount Amount
To Opening Stock 18,700 By Sales 1,85,500
To Purchases 65,000 By Goods Distributed as Free sample 3,000
To Works Manager’s Salary 2,300 By Closing Stock 19,700
To Wages & Salaries 4,000
To Motive Power 1,350
Less: Deposit for Power Meter 500 850
To Custom Duty 1,500
To Gross Profit c/d 1,15,850
2,08,200 2,08,200
To Unproductive Wages 3,000 By Gross Profit b/d 1,15,850
To Audit Fees 2,500 By Discount 400
To Rent 1,800 By Interest 1,300
To Conveyance 2,000
To O/s Interest on Sucheta’s Loan 369
To Advertisement Expenses (Goods distributed as samples) 3,000
To Depreciation on Building 4,400
To R.B.D.D A/c
Bad debts (New) 2,000
Add: New Reserve 1,485 3,485
To Net Profit (Transferred to Capital A/cs)
Sucheta (3/5) 58,197.60
Gayatri (2/5) 38,798.40 96,996
1,17,550 1,17,550

Balance Sheet as on 31st March 2019

Liabilities Amount Amount Assets Amount Amount
Capital Account: Sucheta Deposit Power Meter 500
Opening Balance 75,000 Building 88,000
Add: Net Profit 58,197.60 1,33,197.60 Less: Depreciation @ 5% 4,400 83,600
Capital Account: Gayatri Debtors 47,500
Opening Balance 40,000 Add: Dishonoured Bill 4,000
Add: Net Profit 38,798.40 78,798.40 51,500
Sucheta’s Loan 6,150 Less: Bad Debts (New) 2,000
Add: O/s Int. on Loan 369 6,519 49,500
Creditors 35,000 Less : R.D.D. (New) @ 3% on 49,500 1,485 48,015
Bills Payable 27,300 Bills Receivable 22,000
Less: Dishonoured Bill 4,000 18,000
Goodwill 25,000
Copyrights 20,000
Investments 40,000
Closing Stock 19,700
Cash at Bank 26,000
Total 2,80,815 Total 2,80,815

Working Notes:

  • The rate of interest on the partner’s loan is not mentioned, therefore interest on the loan is calculated at 6% p.a.
    Interest on Sucheta’s Loan = 6150 x 6% = 369
  • Add dishonored bill amount (4,000) to debtors amount (New Debtors = 47,500 + 4,000 = 51,500). Then calculate Bad Debts and R.D.D.
    Bad Debts (New) = 2,000
    Remaining Debtors = 51,500 - 2,000 = 49,500
    R.D.D. @ 3% on 49,500 = 1,485
  • Subtract dishonored bill amount (4,000) from bills receivable amount (New Bills Receivable = 22,000 - 4,000 = 18,000).
  • Net Profit Distribution (Ratio 3:2 for Sucheta:Gayatri):
    Total Net Profit = 96,996
    Sucheta's Share = 96,996 * (3/5) = 58,197.60
    Gayatri's Share = 96,996 * (2/5) = 38,798.40
    (Note: The original solution had rounded figures for profit distribution. Using precise calculations leads to minor differences in final capital and balance sheet totals, which will still tally if consistent.)

Difficult Words & Meanings

  • Partnership: A business owned and managed by two or more individuals who share profits or losses.
  • Final Accounts: Financial statements prepared at the end of an accounting period to show the financial performance (Trading and Profit & Loss Account) and financial position (Balance Sheet) of a business.
  • Trading Account: An account prepared to find out the gross profit or gross loss of a business during a specific period.
  • Profit and Loss Account (P&L Account): An account prepared to ascertain the net profit or net loss of a business after considering all operating and non-operating incomes and expenses.
  • Balance Sheet: A statement showing the assets, liabilities, and capital of a business on a specific date, reflecting its financial position.
  • Trial Balance: A list of all debit and credit balances extracted from ledger accounts to check the arithmetical accuracy of bookkeeping.
  • Debit (Dr.): An entry on the left side of an account, typically representing an increase in assets or expenses, or a decrease in liabilities or income.
  • Credit (Cr.): An entry on the right side of an account, typically representing an increase in liabilities or income, or a decrease in assets or expenses.
  • Capital: The amount invested in the business by the owners (partners).
  • Opening Stock: The value of goods available for sale at the beginning of an accounting period.
  • Debtors (Sundry Debtors): Persons or entities who owe money to the business for goods or services sold on credit.
  • Creditors (Sundry Creditors): Persons or entities to whom the business owes money for goods or services purchased on credit.
  • Bills Receivable: A formal written promise from a debtor to pay a specific sum of money at a future date (an asset).
  • Bills Payable: A formal written promise made by the business to pay a specific sum of money to a creditor at a future date (a liability).
  • Motive Power: Expenses incurred on power (like electricity or fuel) used for running machinery in a factory.
  • Custom Duty: A tax levied on goods imported into a country.
  • Unproductive Wages: Wages paid to workers not directly involved in the production process (e.g., cleaning staff in the office); treated as an indirect expense.
  • Audit Fees: Fees paid to an auditor for examining and verifying the accuracy of the business's financial records.
  • Conveyance: Expenses related to transportation for business purposes.
  • Goodwill: The intangible value of a business based on its reputation, customer base, and other factors that enable it to earn higher profits.
  • Copyrights: Exclusive legal rights granted to the creator of original works (like literary, artistic, or musical works) to reproduce and distribute them.
  • Partner's Loan: Money lent by a partner to the partnership firm, treated as a liability for the firm.
  • Adjustments: Modifications made to account balances at the end of an accounting period to reflect items not yet recorded or to correct errors, ensuring accurate financial statements.
  • Closing Stock: The value of unsold goods at the end of an accounting period.
  • Depreciation: The systematic allocation of the cost of a tangible asset over its useful life, reflecting its wear and tear or obsolescence.
  • Bad Debts: Amounts owed by debtors that are deemed irrecoverable (unlikely to be paid).
  • R.D.D. (Reserve for Doubtful Debts / Provision for Doubtful Debts): An estimated amount set aside from profits to cover potential future bad debts.
  • Dishonored Bill: A bill of exchange or promissory note that the drawee (payer) fails to pay on its due date.
  • Gross Profit: The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services (Sales - Cost of Goods Sold).
  • Net Profit: The actual profit of the business after all expenses (operating and non-operating) have been deducted from all revenues (Gross Profit - Indirect Expenses + Indirect Incomes).
  • Liabilities: The financial obligations or debts of a business owed to external parties.
  • Assets: Resources owned by a business that have economic value and are expected to provide future benefits.
  • Outstanding (O/s) Interest: Interest that has become due but has not yet been paid.