Practise Problem | Q 3 | Page 56 From the following Trial Balance and adjustments given below of Reena and Aarti,

Balbharati solutions for Book-keeping and Accountancy 12th Standard HSC Maharashtra State Board

Chapter 1 Introduction to Partnership and Partnership Final Accounts

Practise Problem | Q 3 | Page 56

From the following Trial Balance and adjustments given below of Reena and Aarti, 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 ₹
Purchases 35,500 Sales 58,200
Sundry Debtors 40,000 Sundry Creditors 25,700
Sales Returns 1,000 Purchases Returns 500
Opening Stock 18,100 R.D.D 800
Bad debts 500 Discount 50
Land & Building 25,000 Commission 250
Furniture 20,000 Capital :
Discount 1,000 Reena 50,000
Royalties 700 Aarti 30,000
Rent 1,900
Salaries 3,000
Wages 800
Insurance 1,500
Drawings :
Reena 2,000
Aarti 1,000
Cash at Bank 11,500
Cash in Hand 2,000
Total 1,65,500 Total 1,65,500

Adjustments:

  1. Closing Stock valued at ₹ 22,000.
  2. Write off ₹ 900 for Bad & doubtful debts and create a provision for Reserve for doubtful debts ₹ 1,000.
  3. Create a provision for Discount on Debtors @3% and creditors @5%.
  4. Outstanding Expenses - Wages ₹ 700 and Salaries ₹ 800.
  5. Insurance is paid for 15 months, w.e.f. 1st April 2018.
  6. Depreciate Land and Building @5%.
  7. Reena & Aarti are Sharing Profits & Losses in their Capital Ratio.

Solution:

In the books of Reena and Aarti
Trading and Profit and Loss Account for the year ended on 31st March 2019
Dr. Cr.
Particulars Amount ₹ Amount ₹ Particulars Amount ₹ Amount ₹
To Opening Stock 18,100 By Sales 58,200
To Purchases 35,500 Less: Sales Return 1,000 57,200
Less: Purchase Return 500 35,000 By Closing Stock 22,000
To Royalties 700
To Wages 800
Add: O/s Wages 700 1,500
To Gross Profit c/d 23,900
Total 79,200 Total 79,200
To Rent 1,900 By Gross Profit b/d 23,900
To Salaries 3,000 By Commission 250
Add: O/s Salaries 800 3,800 By Discount 50
To Insurance 1,500 By R.D.C. (New)
(Reserve for Discount on Creditors)		 1,285
Less: Prepaid Ins. 300 1,200
To Depreciation on Land and Building 1,250
To R.B.D.D. A/c:
Bad debts (Trial Balance) 500
Add: New Bad debts (Adjustment) 900
Add: New Reserve (R.D.D. Adjustment) 1,000
2,400
Less: Old Reserve (R.D.D. Trial Balance) 800 1,600
To Reserve for Discount on Debtors A/c:
Discount (Trial Balance) 1,000
Add: New Reserve for Discount on Debtors 1,143 2,143
To Net Profit (Transferred to Capital A/cs)
Reena 8,495 13,592
Aarti 5,097
Total 25,485 Total 25,485

Video Solution Walkthrough

Balance Sheet as on 31st March 2019
Liabilities Amount ₹ Amount ₹ Assets Amount ₹ Amount ₹
Capital Account: Reena Land and Building 25,000
Opening Balance 50,000 Less: Depreciation @5% 1,250 23,750
Add: Net Profit 8,495 Furniture 20,000
58,495 Closing Stock 22,000
Less: Drawings 2,000 56,495 Sundry Debtors 40,000
Capital Account: Aarti Less: Bad Debts (New Adj.) 900
Opening Balance 30,000 39,100
Add: Net Profit 5,097 Less: Provision for Doubtful Debts (New Adj.) 1,000
35,097 38,100
Less: Drawings 1,000 34,097 Less: Provision for Discount on Debtors @3% 1,143 36,957
Sundry Creditors 25,700 Prepaid Insurance Premium 300
Less: Provision for Discount on creditors @5% 1,285 24,415 Cash at Bank 11,500
Outstanding expenses: Cash in Hand 2,000
Wages 700
Salaries 800 1,500
Total Liabilities 1,16,507 Total Assets 1,16,507

Working Notes:

  1. Insurance premium ₹ 1,500 is paid for 15 months i.e. prepaid insurance premium for 3 months = (1500 / 15) * 3 = ₹ 300.
  2. Reserve for Discount on Debtors = 3% on (Debtors – New Bad debts – New Reserve) = 3% x (40,000 - 900 - 1,000) = 3% x (40,000 - 1,900) = 3% x 38,100 = ₹ 1,143.
  3. Reserve for Discount on Creditors = 5% on (Value of Creditors) = 5% x 25,700 = ₹ 1,285.
  4. Profit and Loss ratio = Capital ratio = 50,000 : 30,000 = 5 : 3.

Difficult Words & Meanings (Book-keeping & Accountancy Context):

  • Trial Balance: A list of all account balances (debits and credits) from the ledger; used to check if total debits equal total credits.
  • Adjustments: Entries made at the end of an accounting period to record revenues and expenses in the correct period and update asset and liability accounts.
  • Trading Account: A financial statement prepared to find out the Gross Profit or Gross Loss made from buying and selling goods.
  • Profit and Loss Account (P&L): A financial statement showing a company's revenues, expenses, and resulting net profit or net loss over a period.
  • Balance Sheet: A snapshot of a company's financial position, listing its assets (what it owns), liabilities (what it owes), and capital (owner's investment) on a specific date.
  • Sundry Debtors: Various customers who owe money to the business for goods/services sold on credit.
  • Sundry Creditors: Various suppliers to whom the business owes money for goods/services bought on credit.
  • R.D.D. (Reserve for Doubtful Debts): An amount set aside from profits to cover expected losses from debtors who might not pay. Also called Provision for Doubtful Debts.
  • Bad Debts: Amounts owed by debtors that are confirmed to be uncollectible.
  • Capital: The total amount of money or other assets invested in a business by its owners or partners.
  • Drawings: Cash or goods withdrawn by the owner(s) from the business for personal use.
  • Closing Stock: The value of goods remaining unsold at the end of an accounting period.
  • Write off: To remove an amount from the accounts, usually because it's a loss (like bad debts) or an asset's value has diminished.
  • Outstanding Expenses: Expenses that have been incurred (used up) during the accounting period but are not yet paid.
  • Prepaid Expenses: Expenses paid in advance, the benefit of which will be received in a future accounting period.
  • Depreciation: The decrease in the value of a fixed asset over time due to use, wear and tear, or becoming outdated.
  • Capital Ratio: The proportion of capital contributed by each partner; sometimes used as the basis for sharing profits or losses.
  • Gross Profit: The profit from basic trading activities, calculated as Sales minus the Cost of Goods Sold.
  • Net Profit: The final profit of the business after all operating expenses, interest, and taxes are deducted from the gross profit and other incomes.
  • Liabilities: Financial obligations or debts of the business to outsiders.
  • Assets: Resources owned by the business that have future economic value.
  • c/d (carried down): Indicates a balance is moved to the next part of the same account or to a summary account.
  • b/d (brought down): Indicates a balance is brought forward from a previous part of an account or period.
  • Royalties: Payments for the use of an asset or right, like a patent or mineral extraction right.
  • Wages: Payments to workers, usually for manual labor, often directly related to production.
  • Salaries: Fixed payments to employees, usually administrative or managerial staff.
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