Kshipra and Manisha Practise Problem | Q: 10 | Page no. 61 Chapter 1: Introduction to Partnership and Partnership Final Accounts

Chapter 1: Introduction to Partnership and Partnership Final Accounts

Practise Problem | Q: 10 | Page no. 61

Kshipra and Manisha are Partners sharing Profit and Loss in their Capital Ratio. You are required to prepare Trading Account 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 ₹
Sundry Debtors 28,000 Sales 1,20,000
Purchases 55,000 Rent 1,800
Furniture 38,500 Sundry Creditors 38,500
Plant & Machinery 60,000 Purchase Return 1,000
Wages 800 Discount 500
Salaries 3,500 Bills Payable 9,000
Discount 800 Capital A/c :
Bills Receivable 14,400 Kshipra 90,000
Carriage Outward 1,000 Manisha 30,000
Postage 500 Current A/c :
Sales Return 500 Kshipra 5,000
Cash in Hand 4,000 Manisha 3,000
Cash at Bank 47,000
Insurance 2,000
Opening Stock 17,800
Trade Expenses 1,500
Warehouse Rent 2,500
Advertisement 1,000
Building 20,000
Total 2,98,800 Total 2,98,800

Adjustments :

  1. Stock on 31st March 2019 was at ₹37,000.
  2. Sales include the sale of machinery of ₹2,000, which is sold on 1st April 2018.
  3. Depreciation on fixed assets @ 5%.
  4. Each Partner is entitled to get Commission at 1% of Gross Profit and Interest on Capital 5% p.a.
  5. Outstanding Expenses Wages ₹200 & Salaries ₹500.
  6. Create provision for doubtful debts @ 3% on Sundry Debtors.

Solution

In the books of Kshipra and Manisha
Trading and Profit and Loss Account for the year ended on 31st March 2019.

Particulars Amount ₹ Amount ₹ Particulars Amount ₹ Amount ₹
To Opening Stock 17,800 By Sales 1,20,000
To Purchase 55,000 Less: Machinery Sold
Less: Purchase Return 1,000 54,000 Wrongly Recorded as Sales 2,000
To Wages 800 1,18,000
Add: O/s Wages 200 1,000 Less: Sales Return 500 1,17,500
To Gross Profit c/d 81,700 By Closing Stock 37,000
Total 1,54,500 Total 1,54,500
To Salaries 3,500 By Gross Profit b/d 81,700
Add: O/s Salaries 500 4,000 By Rent 1,800
To Discount 800 By Discount 500
To Carriage Outward 1,000
To Postage 500
To Insurance 2,000
To Trade Expenses 1,500
To Warehouse Rent 2,500
To Advertisement 1,000
To Provision for Doubtful Debts (New) 840
To Depreciation on:
Furniture 1,925
Plant & Machinery 2,900
Building 1,000 5,825
To Interest on Capital:
Kshipra 4,500
Manisha 1,500 6,000
To Commission to Partners:
Kshipra 817
Manisha 817 1,634
To Net Profit (Transferred to Current A/c)
Kshipra 42,301
Manisha 14,100 56,401
Total 84,000 Total 84,000

Partners’ Current Accounts

Particulars Kshipra ₹ Manisha ₹ Particulars Kshipra ₹ Manisha ₹
To Balance c/d 52,618 19,417 By Balance b/d 5,000 3,000
By Commission 817 817
By Interest on Capital 4,500 1,500
By Net Profit 42,301 14,100
Total 52,618 19,417 Total 52,618 19,417
By Balance b/d 52,618 19,417

Balance Sheet as on 31st March 2019

Liabilities Amount ₹ Amount ₹ Assets Amount ₹ Amount ₹
Capital Accounts: Furniture 38,500
Kshipra 90,000 Less: Depreciation @ 5% 1,925 36,575
Manisha 30,000 1,20,000 Plant & Machinery 60,000
Current Accounts: Less: Sold on 1/4/18 2,000
Kshipra 52,618 58,000
Manisha 19,417 72,035 Less: Depreciation @ 5% 2,900 55,100
Sundry Creditors 38,500 Building 20,000
Bills Payable 9,000 Less: Depreciation @ 5% 1,000 19,000
Outstanding Expenses: Closing Stock 37,000
Wages 200 Sundry Debtors 28,000
Salaries 500 700 Less: Provision for D.D. @ 3% 840 27,160
Bills Receivable 14,400
Cash in Hand 4,000
Cash at Bank 47,000
Total 2,40,235 Total 2,40,235

Working Notes :

  1. Depreciation on fixed assets means depreciation on Furniture, Plant & Machinery and Building.
  2. Sales include the sale of Machinery of ₹2,000 is subtracted from sales and from Plant & Machinery.

    On balance amount of Plant & Machinery ₹58,000, calculate 5 % depreciation i.e. 60,000  -  2,000 = ₹58,000 x 5% = ₹2,900

  3. Here on gross profit calculate 1 % commission for partners and record it to Profit and Loss A/c and in Current A/cs.

    Commission payable to each partner = 1% of Gross Profit = (1/100) x 81700 = ₹817.


Chapter 1: Introduction to Partnership and Partnership Final Accounts


Difficult Words & Their Meanings

  • Partnership Final Accounts: Financial statements (Trading Account, Profit & Loss Account, Balance Sheet) prepared by a partnership firm at the end of an accounting year to show its financial performance and position.
  • Trial Balance: A list of all debit and credit balances from ledger accounts, used to check the arithmetical accuracy of bookkeeping before preparing final accounts.
  • Trading Account: An account prepared to find out the gross profit or gross loss from the main trading activities (buying and selling goods) during an accounting period.
  • Profit and Loss Account (P&L A/c): An account prepared after the Trading Account to determine the net profit or net loss of the business for an accounting period by considering all operating and non-operating incomes and expenses.
  • Balance Sheet: A statement that shows the financial position of a business (assets, liabilities, and capital) on a specific date.
  • Adjustments: Entries made at the end of an accounting period to record incomes and expenses that belong to that period but haven't been recorded, or to account for items like depreciation and provisions. This ensures the financial statements show a true and fair view.
  • Capital Ratio: The ratio based on the amount of capital contributed by each partner. Profits and losses may be shared in this ratio if agreed.
  • Sundry Debtors: Customers who owe money to the business for goods or services bought on credit. (Considered an Asset)
  • Sundry Creditors: Suppliers to whom the business owes money for goods or services purchased on credit. (Considered a Liability)
  • Bills Receivable: A formal written promise (like a bill of exchange or promissory note) received from a debtor to pay a specified sum of money at a future date; an asset for the business.
  • Bills Payable: A formal written promise made by the business to pay a specified sum of money to a creditor at a future date; a liability for the business.
  • Purchases: Cost of goods bought by the business for resale.
  • Purchase Return (or Returns Outward): Goods returned by the business to its suppliers.
  • Sales: Revenue generated from selling goods or services.
  • Sales Return (or Returns Inward): Goods returned to the business by its customers.
  • Carriage Outward: Transportation costs incurred for delivering goods sold to customers; treated as a selling and distribution expense.
  • Opening Stock: The value of goods available for sale at the beginning of an accounting period.
  • Closing Stock: The value of unsold goods remaining at the end of an accounting period.
  • Wages: Payments made to workers, especially for manual labor, directly related to production or services.
  • Salaries: Fixed regular payments made to employees for their services, usually administrative or managerial staff.
  • Trade Expenses: General expenses related to the main business operations, often small miscellaneous operational costs. If not specified, sometimes taken to Profit & Loss A/c.
  • Depreciation: The systematic reduction in the monetary value of a fixed asset over its useful life due to wear and tear, usage, or obsolescence.
  • Fixed Assets: Long-term tangible properties or equipment that a firm owns and uses in its operations to generate income (e.g., building, machinery, furniture). Not intended for resale.
  • Gross Profit: The profit a company makes after deducting the direct costs associated with making and selling its products, or providing its services (Calculated in Trading Account: Sales - Cost of Goods Sold).
  • Net Profit: The actual profit of the business after all operating and non-operating expenses and taxes are deducted from the gross profit and other incomes (Calculated in Profit & Loss Account).
  • Interest on Capital: An amount paid or credited to partners for the capital they have invested in the firm, usually calculated at an agreed percentage per annum. It's an appropriation of profit.
  • Commission (to Partners): A payment made to partners for services rendered, often based on a percentage of sales or profits. It's an appropriation of profit.
  • Outstanding Expenses (O/s Expenses): Expenses that have been incurred (become due) during an accounting period but not yet paid by the end of that period (e.g., O/s Wages, O/s Salaries).
  • Provision for Doubtful Debts (PDD or RBDD - Reserve for Bad and Doubtful Debts): An estimated amount set aside from profits to cover potential losses from debtors who may not pay their dues. It's created on Sundry Debtors.
  • Capital Account: An account maintained for each partner showing their investment (capital) in the business. It can be fixed or fluctuating.
  • Current Account (Partnership): When capital accounts are fixed, a separate account is maintained for each partner to record transactions other than initial or additional capital, such as drawings, interest on capital, salary, commission, and share of profit/loss.
  • Liabilities: Financial obligations or amounts owed by the business to outsiders (e.g., loans, sundry creditors, bills payable).
  • Assets: Resources owned by the business that have monetary value and are expected to provide future economic benefits (e.g., cash, machinery, sundry debtors, building).
  • p.a.: Abbreviation for "per annum," meaning "per year."
  • O/s: Abbreviation for "Outstanding" (e.g., O/s Wages - wages due but not yet paid).
  • c/d: Abbreviation for "carried down," used to transfer a balance from one part of an account to the next, or to the next accounting period.
  • b/d: Abbreviation for "brought down," used to bring forward a balance from a previous part of an account or from a previous accounting period.