Chapter 1: Introduction to Partnership and Partnership Final Accounts Practise Problem | Q: 6 | Page no. 59 Archana and Prerana are partners, sharing Profits and Losses in the ratio 2:1

Chapter 1: Introduction to Partnership and Partnership Final Accounts

Practise Problem | Q: 6 | Page no. 59

Archana and Prerana are partners, sharing Profits and Losses in the ratio 2:1 with the help of following Trial Balance and Adjustments given below. 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

Debit Balance Amount ₹ Credit Balance Amount ₹
Stock (1/4/2018)8,560Capital :
Patents2,000Archana40,000
Sundry Debtors18,500Prerana20,000
Stock of Stationary3,000Other Loans3,000
Trade Mark2,000Reserve fund1,000
Bills Receivable6,300Sundry Creditors17,500
Electricity charges1,450Bills Payable5,000
Wages950Purchase Return1,000
Heating & Lighting1,000R.D.D500
Trade Expenses850Sales30,200
Sales Return400Interest310
Land & Building22,000
Furniture13,000
Cash at Bank5,000
Investments7,500
Drawings :
Archana1,200
Prerana900
Bad debts200
Purchases23,700
Total1,18,510 Total1,18,510

Adjustments:

1) Stock on 31st March 2019 is valued at Cost Price ₹12,000 and Market Price ₹17,000.

2) Our customer Mr. Shekhar failed to pay his dues of ₹800.

3) 1/8th of Patents are to be written off.

4) A part of Furniture ₹5,000 is purchased on 1st Oct 2018.

5) Depreciation on Land & Building 10% and on Furniture 5%.

6) Outstanding Expenses Wages ₹300 and Electricity Charges ₹200.

7) Allow Interest on Capital 3%.

Solution:

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

Particulars Amount (₹) Amount (₹) Particulars Amount (₹) Amount (₹)
To Opening Stock8,560By Sales30,200
To Purchases23,700Less: Sales Return40029,800
Less: Purchase Return1,00022,700By Closing Stock12,000
To Wages950
Add: O/s Wages3001,250
To Heating & Lighting1,000
To Gross Profit c/d8,290
41,80041,800
To Electricity Charges1,450By Gross Profit b/d8,290
Add O/s Ele. Ch.2001,650By Interest310
To Trade Expenses850
To R.B.D.D A/c
Bad debts200
Add: New Bad debts800
Less: Old Reserve (R.D.D)500500
To Written off Patents250
To Depreciation
Furniture525
Land and Building2,2002,725
To Interest on Capital
Archana1,200
Prerna6001,800
To Net Profit (Transferred to Capital A/c)
Archana550
Prerna275825
8,6008,600

Balance Sheet as on 31st March 2019

Liabilities Amount ₹ Amount ₹ Assets Amount ₹ Amount ₹
Capital Account: ArchanaPatents2,000
Opening Balance40,000Less: Written off2501,750
Add: Int. on Capital1,200Furniture13,000
Add: Net Profit550Less: Depreciation (400 + 125)52512,475
41,750Land and Building22,000
Less: Drawings1,20040,550Less: Depreciation2,20019,800
Capital Accounts: PrernaStock of Stationery3,000
Opening Balance20,000Closing Stock12,000
Add: Int. on Capital600Sundry Debtors18,500
Add: Net Profit275Less: Bad Debts (New)80017,700
20,875Trade Mark2,000
Less: Drawings90019,975Bills Receivable6,300
Other Loans3,000Cash at Bank5,000
Reserve Fund1,000Investments7,500
Sundry Creditors17,500
Bills Payable5,000
Outstanding Expenses
Wages300
Electricity Charges200500
Total87,525 Total87,525

Working Notes:

(1) Stationery stock is an asset.

(2) Depreciation on furniture:

Total Value of Furniture = ₹13,000.

₹8,000 (Opening Balance)₹5,000 (Purchased on 01/10/18)
₹8,000 x 5% (Depreciation for full Year) = ₹400₹5,000 x 5% x 6/12 (Depreciation for 6 months) = ₹125

Total Depreciation = ₹400 + ₹125 = ₹525

(3) ⅛th of Patents to be written off = ₹2,000 x (⅛) = ₹250.

(4) As no other expenses are given, Trade Expenses is recorded in Profit and Loss Account.

Difficult Words and Their Meanings:

  • Partnership: A business structure where two or more individuals manage and operate a business in accordance with an agreement.
  • Final Accounts: Financial statements (Trading A/c, P&L A/c, Balance Sheet) prepared at year-end to show a business's financial performance and position.
  • Trial Balance: A list of all account balances (debit and credit) from the ledger, used to check arithmetic accuracy before preparing final accounts.
  • Adjustments: Entries made at the end of an accounting period to record unrecognized income or expenses, ensuring accuracy of financial statements.
  • Trading Account: Calculates Gross Profit or Gross Loss by comparing sales revenue with the cost of goods sold.
  • Profit and Loss Account (P&L A/c): Determines the Net Profit or Net Loss by summarizing all revenues and expenses for a period.
  • Balance Sheet: A snapshot of a company's assets, liabilities, and equity at a specific point in time.
  • Patents: Exclusive legal rights granted for an invention, treated as an intangible asset.
  • Sundry Debtors: Customers who owe money to the business for goods/services bought on credit.
  • Trade Mark: A symbol, logo, or name legally registered to represent a company or product; an intangible asset.
  • Bills Receivable: Formal IOUs from customers promising to pay a specific amount at a future date (an asset).
  • Wages: Payments to employees, usually for manual labor, often considered a direct expense.
  • Drawings: Withdrawals of cash or goods by partners from the business for personal use.
  • Bad Debts: Amounts owed by debtors that are deemed uncollectible.
  • Capital: Funds invested by the partners into the business.
  • Reserve Fund: Profits set aside for future needs or to strengthen financial stability.
  • Sundry Creditors: Suppliers to whom the business owes money for credit purchases.
  • Bills Payable: Formal IOUs issued by the business to suppliers, promising payment at a future date (a liability).
  • R.D.D. (Reserve for Doubtful Debts): A provision made for potential bad debts from sundry debtors.
  • Depreciation: The decrease in the value of fixed assets over time due to wear and tear or obsolescence.
  • Outstanding Expenses: Expenses incurred during the accounting period but not yet paid.
  • Gross Profit: Profit before deducting operating expenses (Sales - Cost of Goods Sold).
  • Net Profit: The final profit after all expenses (including taxes and interest) are deducted from revenues.
  • Liabilities: Financial obligations or debts owed by the business to external parties.
  • Assets: Resources owned by the business that have economic value (e.g., cash, buildings, machinery).
  • Written off: Reducing the book value of an asset (like patents) or recognizing an expense (like bad debts).