Chapter 1: Introduction to Partnership and Partnership Final Accounts
Practise Problem | Q: 7 | Page no. 59
Satish and Pramod are Partners. Prepare Trading Account and Profit and Loss Account for the year 31st March 2019. You have to find out Gross Profit and Net Profit only.
Trial Balance as on 31st March 2019
| Debit Balance | Amount ₹ | Credit Balance | Amount ₹ |
|---|---|---|---|
| Stock (1/4/2018) | 8,700 | Sales | 68,000 |
| Purchases | 18,300 | Dividend | 2,000 |
| Wages | 1,000 | Purchases Return | 500 |
| Insurance | 800 | Sundry Creditors | 13,000 |
| Unproductive Wages | 1,400 | 10% Bank Loan | 8,000 |
| Warehouse Rent | 600 | (w.e.f. 1/7/2018) | |
| Carriage Outward | 1,200 | Other Receipts | 1,000 |
| Sales Return | 600 | ||
| Export Duty | 1,400 | ||
| Customs Duty | 800 | ||
| Sundry Debtors | 40,000 | ||
| Investments | 15,700 | ||
| Factory Rent | 1,600 | ||
| Postage & Telegram | 400 | ||
| Total | 92,500 | Total | 92,500 |
Adjustments:
- The Closing Stock is valued at ₹ 15,400.
- Outstanding Wages ₹ 500.
- Create provision for Bad debts ₹ 800 and maintain R.D.D 3% on Sundry Debtors.
- Goods of ₹ 1,800 distributed as a free sample.
- Goods of ₹ 2,000 were sold and delivered on 31st March 2019 but no entry is passed in the Books of Account.
(Ans : G.P. ₹ 56,200, N.P. ₹ 48,964 )
Solution:
In the books of Satish and Pramod
Trading and Profit and Loss Account
for the year ended on 31st March 2019
| Dr. | Amount ₹ | Amount ₹ | Cr. | Amount ₹ | Amount ₹ | ||
|---|---|---|---|---|---|---|---|
| Particulars | (Inner) | (Outer) | Particulars | (Inner) | (Outer) | ||
| To Opening Stock | 8,700 | By Sales | 68,000 | ||||
| To Purchases | 18,300 | Less: Sales Return | 600 | ||||
| Less: Purchase Return | 500 | 17,800 | 67,400 | ||||
| To Wages | 1,000 | Add: Unrecorded Sales | 2,000 | 69,400 | |||
| Add: O/s Wages | 500 | 1,500 | By Closing Stock | 15,400 | |||
| To Customs Duty | 800 | By Goods Distributed as Free Samples | 1,800 | ||||
| To Factory Rent | 1,600 | ||||||
| To Gross Profit c/d | 56,200 | ||||||
| Total | 86,600 | Total | 86,600 | ||||
| To Advertisement Expenses (Free Samples) | 1,800 | By Gross Profit b/d | 56,200 | ||||
| To Insurance | 800 | By Dividend | 2,000 | ||||
| To Unproductive Wages | 1,400 | By Other Receipts | 1,000 | ||||
| To Carriage Outward | 1,200 | ||||||
| To Warehouse Rent | 600 | ||||||
| To Export Duty | 1,400 | ||||||
| To Postage & Telegram | 400 | ||||||
| To O/s Interest on Bank Loan (W.N. 2) | 600 | ||||||
| To R.B.D.D A/c (W.N. 4) | |||||||
| Bad debts (given) | Nil | ||||||
| Add: New Bad debts | 800 | ||||||
| Add: New R.D.D | 1,236 | 2,036 | |||||
| To Net Profit (Transferred to Capital A/cs) | |||||||
| Satish | 24,482 | ||||||
| Pramod | 24,482 | 48,964 | |||||
| Total | 59,200 | Total | 59,200 | ||||
Video Explanation:
Working Notes:
- Here only gross profit and net profit are to find out. Therefore, the Balance Sheet is not prepared.
- Interest on 10% bank loan is calculated for 9 months (From 1/7/2018 to 31/3/2019):
Interest = (PNR/100) = 8000 x 10% x (9/12) = ₹ 600 - Goods distributed as free samples (₹ 1,800) is an advertisement expense for business. It's credited to Trading A/c (or deducted from Purchases) and debited to Profit & Loss A/c.
- Calculation for R.B.D.D.:
Sundry Debtors (as per Trial Balance) ₹ 40,000 Add: Unrecorded Sales (Adjustment 5) ₹ 2,000 Total Debtors before New Bad Debts ₹ 42,000 Less: New Bad Debts (Adjustment 3) ₹ 800 Debtors for R.D.D. calculation ₹ 41,200 Less: New R.D.D. @ 3% on ₹ 41,200 (Adj. 3) ₹ 1,236 Net Sundry Debtors (for Balance Sheet) ₹ 39,964 Total for R.B.D.D A/c (to be debited to P&L A/c):
New Bad Debts: ₹ 800
New R.D.D.: ₹ 1,236
Total = ₹ 800 + ₹ 1,236 = ₹ 2,036
Difficult Words & Meanings:
- Partnership: A business structure where two or more individuals (partners) agree to share in the profits or losses of a business they jointly own and operate.
- Final Accounts: A set of financial statements prepared at the end of an accounting period. They typically include the Trading Account, Profit and Loss Account, and Balance Sheet, showing the business's financial performance and position.
- Trading Account: A financial statement that shows the gross profit or gross loss of a business from its primary trading activities (buying and selling goods) during a specific period.
- Profit and Loss Account (P&L Account): A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, to determine the net profit or net loss of the business.
- Trial Balance: A worksheet listing all the balances of ledger accounts (both debit and credit) on a specific date. It's used to check the arithmetical accuracy of the accounting records before preparing final accounts.
- Debit Balance: An account balance where the total of debits exceeds the total of credits. Typically found in asset and expense accounts.
- Credit Balance: An account balance where the total of credits exceeds the total of debits. Typically found in liability, capital (equity), and income accounts.
- Stock (Opening/Closing): Refers to the inventory of goods. Opening Stock is the value of goods at the beginning of an accounting period, and Closing Stock is the value at the end.
- Purchases: The total amount of goods bought by a business during an accounting period for resale or for use in production.
- Sales: The total amount of revenue earned by a business from selling its goods or services during an accounting period.
- Wages: Payments made to employees, especially for manual labor or direct production work.
- Unproductive Wages: Wages paid for work not directly related to manufacturing goods (e.g., cleaning staff in office). Treated as an indirect expense.
- Carriage Outward: Transportation costs incurred by a business to deliver goods sold to its customers. It's an operating expense.
- Customs Duty: A tax imposed on goods when they are transported across international borders (imported). If on purchases, it's a direct expense.
- Sundry Debtors: Individuals or businesses who owe money to the company, usually for goods or services sold on credit. They are current assets. (Also called Accounts Receivable).
- Sundry Creditors: Individuals or businesses to whom the company owes money, usually for goods or services purchased on credit. They are current liabilities. (Also called Accounts Payable).
- Dividend: A sum of money paid regularly (typically annually) by a company to its shareholders out of its profits or reserves. In this context, it's income if received.
- Purchases Return (Return Outwards): Goods returned by the business to its suppliers. This reduces the total purchases.
- Sales Return (Return Inwards): Goods returned by customers to the business. This reduces the total sales.
- Adjustments: Modifications or updates made to account balances at the end of an accounting period to accurately reflect income, expenses, assets, and liabilities according to accounting principles (e.g., accruals, prepayments).
- Outstanding Wages: Wages that have been earned by employees during an accounting period but have not yet been paid by the business. It's a current liability.
- Provision for Bad Debts: An estimated amount set aside from profits to cover potential losses from debtors who are unlikely to pay their dues.
- R.D.D. (Reserve for Doubtful Debts): Similar to Provision for Bad Debts, it's an amount set aside to cover expected losses from customers who may not pay what they owe.
- Gross Profit (G.P.): The profit a business makes from its core trading activities, calculated as Sales less the Cost of Goods Sold. (Sales - (Opening Stock + Purchases + Direct Expenses - Closing Stock)).
- Net Profit (N.P.): The final profit of a business after all operating expenses, interest, and taxes have been deducted from the Gross Profit and any other income has been added.
- Particulars: A column in accounting ledgers and statements that describes the nature of the transaction or item.
- c/d (carried down): An abbreviation used in ledger accounts to indicate that the balance of that account is being brought forward to the next accounting period or the next section of the account on the opposite side.
- b/d (brought down): An abbreviation used in ledger accounts to indicate that the balance of that account has been brought forward from the previous accounting period or the previous section of the account on the same side.
- Unrecorded Sales: Sales transactions that have occurred but have not yet been entered into the company's accounting records.
- w.e.f. (with effect from): An abbreviation meaning that a particular rule, rate, or item applies starting from a specified date.
