ACCOUNTANCY

HIGHER SECONDARY SECOND YEAR

VOLUMEI

UntouchabilityisaSin
UntouchabilityisaCrime
UntouchabilityisInhuman

TAMILNADU
TEXTBOOKCORPORATION

CollegeRoad,Chennai600
Governmentof
Tamilnadu
FirstEdition
2005
Reprint2006

006.

for
Women
Chen
nai
600
018.

CHAI
R
PERS
ON

D
r.
(M
rs)

R.
A
M
U
T
H
A
Rea
der
in
Com
merc
e
Justice
Basheer
Ahmed
Sayeed
College

REVIE
WERS
Dr.R.
MATHIALAGAN
Dr.K.
GOVINDARAJAN
Readerin
Commerce
Readerin
Commerce
GovernmentArts
College(Men)
Annamalai
University
Nandanam,Chennai
600035.
Annamalai
Nagar608002.

AUTHO
RS
ThiruS.S.
KUMARAN
ThiruN.

MOORTHY

Coordinator,
PlanningUnit
P.G.Asst.
(SpecialGrade)
(Budget&
Accounts)
Govt.
Higher
Secondary
School
EducationforAll
Project
Nayakanpettai
631601
CollegeRoad,
Chennai600006.

Kancheepuram
District.
Mrs.N.
RAMA

P.G.
Assistan
t
L
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d
y

A
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Price:Rs.
Thisbookhas
beenprepared
bythe
Directorateof
School
Educationon
behalfofthe
Govt.of

Tamilnadu.
This
book
has
been
printed
on60
G.S.M.
paper
PrintedbyOffsetat
:

PREFA
CE
Thebookon
Accountancy has
been written
strictly

in
accordance with
the new syllabus
framed by the
Directorate of
School
Education,
Government of
TamilNadu.
As
curriculum
renewal is a
continuous
process,
Accountancy
Curriculum has
been improved
from time totime
inaccordancewith
the changing
needs of the
society. The
present effort of
reframing and

updating the
curriculum in
Accountancy at
the

Higher
Secondarylevelis
an exercise based
onthefeedback.

The text
book for Higher
Secondary First
year deals with
the

basic
framework of
accounting in all
its aspects. The
next step is the
logical
applicationofthe
subject matter in
maintaining
records

in
differentformsof
business
enterprises.
The text
books for Higher
Secondary
Second year has
been divided into
two volumes.

Volume I, the
presentbookdeals
with

the
preparation of
financial
statements and
theiranalysis.The
two chapters
Financial
Statement
Analysis Ratio
AnalysisandCash
Budget

are
included in the
new syllabus,
because of its
significanceinthe
sphereofdecision
making

in
business. Volume
II deals with
Partnership
Accounts and
Company
Accounts.
iii

SYLLA
BUS
VOLU

Each chapter
starts with a
simple and lucid
discussion of the
topicfollowedby
properly arranged
worked out
illustrations and
ends

with
theoretical
questions and
practical
exercises.
Students are
strongly advised
togothroughthe
Reference
Books

as
Questions for
examinations
need not be
restricted to the
exercisesalone.
R.Amutha
Chairperson
MEI
1.
Final
Accounts

Discount on
Debtors
Provisionfor
Discount on
Creditors
Preparation
of Final
Accounts.

Adjustments
[24
Periods]
Adjustments
Closing
Stock
Outstanding
Expenses
Prepaid
Expenses
Accrued
Incomes
Incomes
received in
Advance
Interest on
Capital
Interest on
Drawings
Interest on
Loan
Interest on
Investments

Depreciation
BadDebts
Provisionfor
Bad &
Doubtful
Debts
Provisionfor

2.

Accounts
from
Incomplete
Records

(SingleEntry)

[21Periods]
Features of
SingleEntry
Limitations
of Single
Entry
Difference
between
Double Entry
System and
SingleEntry
Distinction
between
Statement of
Affairs and
Balance

Sheet
Methods of
ascertaining
ProfitorLoss
Statement
of Affairs
Method
Procedure
Conversion
Method
Procedurefor
converting
Single Entry
into Double
Entry System
Calculation
of missing
figures
Ascertainmen
t of Total
Purchases
Ascertainmen
t of Total
Sales
Ascertainmen
t of Balances
of Sundry
debtors and
Sundry
Creditors.

3.
Depreciation
Accounting
[14
Periods]
Definition
Need for
Providing
Depreciation
Causes of
Depreciation
Terms used
for
Depreciation
Methods of
calculating
Depreciation
Straight Line
Method
WrittenDown
ValueMethod
Annuity
Method
Depreciation
Fund Method
Insurance
Policy
Method
Revaluation

Method
Recording
Depreciation
Calculation of
Profit or Loss
on Sale of
Asset.

4.

Financial
Statement
Analysis
Ratio
Analysis
[28Periods]
Significance
of Financial
Statement
Analysis
Limitation of
Financial
Statement
Analysis
Ratio
Analysis
Definition
Objectives
Classification
of Ratios
Liquidity
Ratios
CurrentRatio,
Liquid Ratio
and Absolute
LiquidRatio
Solvency
RatiosDebt
Equity Ratio
and

Proprietory
Ratio

Profitability
RatiosGross
Profit Ratio,
Net Profit
Ratio,
Operating
Profit Ratio
and Operating
Ratio

Activity
Ratios
Capital
Turnover
Ratio, Fixed
Asset
Turnover
Ratio, Stock
Turnover
Ratio,Debtors
Turnover
Ratio and
Creditors
Turnover
Ratio.

5.
Cash
Budget
[7
Periods]

Budget
Definition
Characteristic
sCash
Budget
Advantages
Preparation
ofCash
Budget
Receiptsand
Payments
Method.

VOLU
MEII
6.
Partnership
BasicConcepts
[14
Periods]
Definition
Features
Accounting
rules
applicable in
theabsenceof
Partnership
Deed

Partners
Capital

Account
Fluctuating
Capital
Method
Fixed Capital
Method
Difference
betweenFixed
& Fluctuating
Capital
Account
Distribution
of Profit
Interest on
Capital
Interest on
Drawings
Salary,
Commission
to Partner
Preparation of
Profit and
Loss
Appropriation
Account
Goodwill

Method of
valuing
Goodwill
Average
Period
Method
Super Profit
Method.

7.
Partnership
Admission
[28
Periods]
Introduction
Adjustments
New Profit
SharingRatio
Sacrificing
Ratio

Calculation of
New Profit
Sharing Ratio
andSacrificing
iv

Ratio
Revaluation
ofAssetsand
Liabilities

Undistribute
d Profit or
Loss
Accumulated

Reserve
Treatment of
Goodwill
Revaluation
Method
Capital of
New Partner
Preparation
of
Revaluation
Account,
Capital
Accounts
and Balance
Sheet after
admission of
Partner.

Calculation of
New Profit
Sharing Ratio
and Gaining
Ratio

Revaluation
of Assets and
Liabilities
Undistributed
Profit or Loss

Accumulated
Reserve
Treatment of
Goodwill
Payment to
the Retiring
Partner
Preparation of
Revaluation
Account,
Capital
Accounts,
BankAccount
and Balance
Sheet of the
Reconstituted
Partnership
Firm.

8.
Partnership
Retirementofa
Partner
[19
Periods]
Introduction
Adjustments
New Profit
Sharing Ratio
Gaining
Ratio

9.

Company

Accounts
[35
Periods]
Introduction
Characteristic
s Types of
Share Capital
Kinds of
SharesIssue
of Shares
For
consideration
For cash
Issue of
SharesatPar
Issue of
Shares at
Premium
Issue of
Shares at
Discount
Calls in
Advance
Calls in
Arrears
Forfeiture of
Shares
Reissue of
Forfeited
Shares

Capital
Reserve.

CO
NT
EN
TS
VO
LU
ME
I

Chapter

PageNo.

1. FinalAccountsAdjustments

2. AccountsfromIncompleteRecords
(SingleEntry)

79

3. DepreciationAccounting

126

4. FinancialStatementAnalysisRatioAnalysis

169

5. CashBudget

229

vi

vii

Booksforfurtherreference:

1. T.S.GrewalDoubleEntryBookKeeping.
2. R.L.GuptaPrinciplesandPracticeofAccountancy
3. T.S.GrewalIntroductiontoAccountancy
4. S.Kr.PaulAccountancyVol.I.
5. InstituteofCompanySecretariesofIndiaPrincipleof
Accountancy.

6. Vinayagam,P.L.Mani,K.L.NagarajanPrinciplesofAccountancy.
7. P.C.Tulsian,S.D.TulsianFinancialAccounting.
8. TamilNaduTextbookCorporationAccountancyHigher
SecondarySecondYear.

9. Jain&NarangFinancialAccounting.
10. R.L.Gupta,RadhaSwamyFinancialAccounting.
11. R.K.Gupta,V.K.GuptaFinancialAccounting.
12. BasuDasPracticeinAccountancy.
13. M.C.ShuklaAdvancedAccountancy.
14. M.C.Shukla&T.S.GrewalAdvancedAccounts.
15. M.P.Vittal, S.K.Sharma, S.S.Sehrawat, National Council of
EducationalResearchandTraining AccountancyTextBook
forClassXIFinancialAccountingPartII.

16. L.S.Porwal, R.G.Saxena, B.Banerjee, Man Mohan, N.K.Agarwal,

NationalCouncilofEducation,Research&TrainingAccounting
ATextbookforClassXIPartII.

17. T.S.GrewalAnalysisofFinancialStatements

18. Dr.R.K.Sharma,Dr.R.S.PopliSelfTutor,Accountancy.
19. S.N.MaheshwariPrinciplesofManagementAccounting.

Chapter -1

FINAL ACCOUNTS ADJUSTMENTS

Learning Objectives

AfterstudyingthisChapter,youwillbeableto
1 understandtheneedformakingadjustmentsinfinal
accounts.
2 know the items in respect of which adjustments are
usuallymadeinthebooksofaccount.
3 passnecessaryjournalentriesfordifferentadjustments.
4 preparefinalaccountswithadjustments.

When a person starts a business he wishes to know the

financialperformanceofhisbusiness.Aconvinientanduniversally
acceptedmethodofknowingthisistoascertaintheprofitorlossat
yearlyintervals(1stAprilto31stMarch)andthefinancialposition
ofthebusinessonagivendate.Hecanascertainthesebypreparing
the Final Accounts, which is prepared on the basis of the Trial
Balance.ThepreparationofFinalAccountsisthelaststepinthe
accountingcycleandthatiswhytheyarecalledFinalAccounts.
1

FinalAccounts
includethe
preparationof
1)

2)

Tradingand
Profit and
Loss
Account ;
and
Balance
sheet.

Finalaccountsare
the means of
conveying

the
profitability and
financial position to
management, owners
and

interested
outsiders of the
business.

Final
accounts have to be
preparedeveryyear,to
make a continuous
assessment of the
business for a
completed period. It
must be kept in mind
that expenses and
incomes for the full
accounting period are
to be taken into
account.

Suppose,thefirm
closes its books on
31st March and rent
for the month of
March has not been
paid, this expense
(rent) has been
incurredandyettobe
paid. Therefore, it
would be proper to
includetherentforthe
month (March) along
with the rent of the
yeartoknowthetrue
profit.In afirmthere
will be a number of
items, both expenses
and incomes, which
havetobeadjusted.If
such items are not
adjusted, the final
accounts will not
revealthetrueandfair
pictureofthebusiness
performance.Allsuch
itemswhichneedtobe
brought into books of
accountatthetimeof
preparing

final
accounts are called
adjustments.Journal
entriespassedtoeffect
the

required

adjustmentsareknown
asadjustingentries.

1.1 Adjustments
Some important
and common items,
which need to be
adjustedatthetimeof
preparing the final
accountsarediscussed
below.

1.

Closing
stock

2.

Outstanding
expenses

3.

Prepaid
Expenses

4.

Accrued
incomes

5.

Incomes
received in
advance

6.

Interest on
capital

7.

Interest on
drawings

8.

Interest on
loan

9.

Interest on
investment

10. Depreciatio
n
11. BadDebts
12. Provision
for bad and
doubtful
debts
13. Provision
for discount
ondebtors
14. Provision
for discount
oncreditors.
Note:All
adjustmentsaregiven
outsidethetrial
balance.
1.1.1 Closing Stock

The unsold
goodsinstockatthe
endoftheaccounting
period is called as
closingstock.Thisis

tobevaluedatcostor
market

price
whicheverislower.

ry
Date

Example:

Particulars

2004
Mar31 ClosingstockA/c
ToTradingA/c
(closingstockrecorded)

The value of
closing stock shown
outside the trial
balanceon31.3.2004
isRs.1,00,000.

Valueofclosing
stockwillappear
1) onthecredit
side of
trading
accountand
2) on the
assets side
of balance
sheet.

A
dj
us
ti
ng
E
nt
2

Trading
accountforthe
yearending
31stMarch,
2004

on31st
March,
2004
Liabilities

Rs.

Dr.
Particulars

Balance
Sheetas

Rs.

1.1.2 Outstanding
Expenses

Expenses which
have been incurred
but not yet paid
duringtheaccounting

period for which the

final accounts are
being prepared are
calledasoutstanding
expenses.
Example: Trial
balance shows
salaries

paid
Rs.22,000.
Adjustment: Salary
for March 2004,
Rs.2,000notyetpaid.
A
dj
us
tin
g
En
tr
y
Date

Particulars

2004
Mar31 SalariesA/c
ToSalariesoutstandingA/c
(Marchsalaryoutstanding)

Outstanding
expenseswillbe
shown
1)

onthedebit

side of
Profit and
Loss
account by
way of
additions to
the
particular
expenses
and
2)

on the
liabilities
side of the
Balance
Sheet.

Dr.

P
r
o
fi
t
a
n
d
L
o
s
s
a
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004
Particulars

ToSalariesA/c
Add:Outstanding

Rs.

Sheetas
on31st
March,
2004
Liabilities
OutstandingSalaries

1.1.3 Prepaid
Expenses

Expenses which
have been paid in
advancearecalledas
prepaid (unexpired)
expenses.

Rs.

22,000
2,000
24,000

Balance

Example: Trial
Balance for the
period ending 31st
March, 2004 shows
Rs.15,000

as
insurance premium.
Adjustment: Prepaid
Insurance premium
Rs.7,500.
A
dj
us
ti
ng
E

Rs.
2,000

Profit and
Loss
account by
way of
deduction
from the
particular
expenses
and

nt
ry
Date

Particulars

2004
Mar31 PrepaidInsurancePremiumA/cDr
ToInsurancePremiumA/c
(Insurancepremiumpaid
inadvance)

2)

Prepaidexpenseswill
beshown
1)

onthedebit
side of the
P
r
o
f
i
t
&

L
o
s
s
A
c
c
o
u

on the
assets side
of the
Balance
Sheet.

n
t
forthe
year
ending
31st
March,
2004

Dr.

Particulars
ToInsurance
premiumA/c
Less:Prepaid

Rs.

Rs.

15,000
7,500
7,500

Balance
Sheetas
on31st

March,
2004

nt
ry

Liabilities

Rs.

Date

Particulars

2004
Mar31 AccruedcommissionA/c
ToCommissionA/c
(commissionearnedbut
notreceived)

1.1.4 Accrued
Incomes or
Outstanding
Incomes

Income which
has been earned but
not received during
theaccountingperiod
is called as accrued
income.
Example: Credit
sideofTrialBalance
(31.3.2004) shows
commission received
Rs.8,000.
Adjustment:
Commission accrued
but not yet received
Rs.2,000.
A
dj
us
ti
ng
E

Accruedincomewill
beshown
1)

2)

on the
credit side
of Profit
and Loss
account by
way of
addition to
particular
incomeand
on the
assets side
of the
Balance
Sheet

Dr.

P
r
o
f
i
t
&

L
o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004
Particulars

Rs.

Balance
Sheet
ason
March
31,
2004
Liabilities

Rs.

1.1.5 Incomes
Received in
Advance
Income received
during a particular
accountingperiodforthe
worktobedoneinfuture
period is called as
income received in
advance.

Rs.

Example: Trial
Balance for the
period ending 31st
March, 2004 shows
Rent

received
Rs.25,000.
Adjustment: Rent
received in advance
Rs.5,000.
A

shown

dj
us
ti
ng
E
nt
ry
Date

1)

Particulars

2004
Mar31 RentreceivedA/c
Dr
ToRentreceivedinadvanceA/c
(rentreceivedinadvance)

2)

Incomesreceivedin
advancewillbe
P
r
o
f
i
t
&

L
o
s
s
A
c
c

on the
credit side
oftheProfit
and Loss
account by
way of
deducting
from the
particular
incomeand
on the
liabilities
side of the
Balance
sheet.
o
u
n
t
forthe
year
ending
31st
March,
2004

Dr.
Particulars

Rs.

Rs.

B
L

us
ti
ng
E
nt
ry

Balance
Sheetas
on31st
March,
2004
Liabilities
Rentreceivedinadvance

Rs.

Date

5,000

2004

Particulars

Mar31 InterestoncapitalA/c

1.1.6 Interest on
Capital

ToCapitalA/c
(6%interestoncapital)

In order to see
whetherthebusinessis
reallyearningprofitor
not, it is desirable to
charge interest on
capital at a certain
rate.

Example:Asper
TrialBalance,capital
as on 31.3.2004 is
Rs.4,00,000.
Adjustment: Provide
6% interest on
capital.
A
dj

Tobringinterest
on capital to Profit
andLossaccount,the
following transfer
entryisrequired.

Tr
an
sfe
r
En
try
Date

Particulars

2004
Mar31 Profit&LossA/c
ToInterestonCapitalA/c
(Interestoncapitaltransferred
toProfit&LossA/c)

Interestoncapital
willbeshown
1) onthedebit
side of
Profit and
Loss
accountand
2)

on the
liabilities
side of the
Balance
Sheet by
way of
addition to
thecapital.
P
r
o

Dr.

f
i
t
&

L
o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004
Particulars

ToInterestonCapitalA/c

Balance
Sheet
ason
March
31,

Rs.
24,000

ownerforhispersonal
use is called as
drawings. When
interest on capital is
allowed, then interest
on drawings
is
charged from the
owner. Interest on
drawingsisanincome
for the business and
willreducethecapital
oftheowner.

2004
Liabilities
Capital

Rs.

Rs.

4,00,000

Add:Intereston
capital

24,000
4,24,000

1.1.7 Interest on
Drawings

Amount
withdrawn by the
8

Example:Thetrial
balanceshowsthe
following:

ry
Date

Capitalason31.3.2004
Drawingsason31.3.2004
Adjustment:
Chargeinterest
ondrawings@
5%.
A
dj
us
ti
ng
E
nt

Particulars

2004
Mar31 CapitalA/c
ToInterestonDrawingsA/c
(Interestondrawings)

Tobringinterest
ondrawingstoProfit
andLossaccountthe
following transfer
entryisrequired.
Tr
an
sfe
r
En
try
Date

Particulars

2004
Mar31 InterestondrawingsA/c
ToProfit&LossA/c
(Interestondrawings)

Interestondrawings
willbeshown
1) onthecredit
side of
Profit and
Loss
accountand
2) on the
liabilitiesside
of

the

BalanceSheet
by way of
addition to
the drawings
which are
ultimately
deducted
from

the

capital.

P
r
o
f
i
t
&

Dr.

L
o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004
Particulars

Rs.

Balance
Sheetas
on31st
March,
2004
Liabilities
Capital
Less:Drawings
30,000
Intereston
drawings1,500

Rs.

Interestpaid
Adjustment:
Providefor
interestonbank
loanoutstanding.
Rs.

A
dj
us
ti
ng
E
nt
ry

4,00,000

31,500
3,68,500

1.1.8 Interest on
Loan (Outstanding)

Borrowingsfrom
banks, financial
institutions and
outsidersforbusiness
are called loans.
Amount payable
towards interest on
loanisanexpensefor
thebusiness.
Example:The
trialbalance
(31.3.2004)
showsthe
following:

Bankloan@10%on1.4.03

Date

Particulars

2004
Mar31 InterestonBankloanA/c
ToInterestoutstandingA/c
(theinterestonbankloan)

Interestonloan
outstandingwillbe
shown
1)

onthedebit
side of the
Profit and
Loss
account by
way of
addition to
the
appropriate

interest
accountand
2)

sheet by
way of
addition to
the
particular
loan
account.

on the
liabilityside
of the
Balance
10

P
r
o
f
i
t
&

L
o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,

11

Dr.

2004
Particulars

ToInterestonloan
Add:Interest
outstanding

Rs.

Rs.

14,000
26,000
40,000

Balance
Sheetas
on31st
March,
2004
Liabilities

Rs.

Rs.

Bankloan@10% 4,00,000
Add:Interest
outstanding

26,000
4,26,000

Note:Intereston
Bankloan@10%on
Rs.4,00,000forthe
year
=Rs.4,00,000x10/100

Adjustment:

Less:InterestpaidasperTrialbalance
Interestoutstanding(Yettobepaid)

Providefor
accruedinterest
oninvestments
Rs.10,000.
A
dj
us
ti
ng
E
nt
ry

1.1.9 Interest on
Investment:
Interestreceivable
oninvestmentsis
anincomeforthe
business.

Example:The
TrialBalance
(31.03.04)shows
thefollowing:

Investments@10%
Interestreceivedoninvestments

Date

Particulars

2004
Mar31 Accruedintereston
investmentsA/c
ToInterestreceivedA/c
(Accruedinterestoninvestment
provided)

Accrued interest
on investments
(outstanding interest
receivable) will be
shown
1)

On the
credit side
oftheProfit
and Loss
account by
way of

addition to
the
appropriate
interest
accountand
2)

On the
assets side
of the
balance
sheet by
way of
addition to
the
investments
account.
P
r
o
f
i
t

a
n
d

l
o
s
s

a
c
c
o
u
n
t

f
o
r

t
h
e

p
e
r
i
o
d

y
e
a
r

3
1

Particulars

Rs.

Rs.

B
A

M
a
r
c
h
,

2
0
0
4

Balance
Sheetas
on31st
March,
2004
Liabilities

Rs.

A
5,10,000

Dr.

13

1.1.10 Depreciation

Depreciation is
the reduction in the
value of fixed assets
due to its use or
obsolescence.
Generally
depreciation

is
charged at some
percentage on the
valueoffixedasset.
Example: The
Trial balance shows

Rs.

thevalueoffurniture
on 31.3.2004 as
Rs.60,000.
Adjustment:
Furniture is to be
depreciatedat10%.

A
dj
us
ti
ng
E
nt
ry
Date

Particulars

accountand
2004
Mar31 DepreciationA/c
ToFurnitureA/c
(10%depreciationonfurniture)

To

bring
depreciation into
Profit and Loss
accountthefollowing
transfer entry is
required.
Tr
an
sfe
r
En
try
Date

Particulars

2004
Mar31 Profit&LossA/c
ToDepreciationA/c
(10%depreciationonfurniture
transferredtoProfitandLoss
account)

Depreciationwillbe
shown
1)

onthedebit
side of
Profit and
Loss

2)

on the
assets side
of the
Balance
Sheet by
way of
deduction
from the
value of
concerned
asset.

Dr.

P
r
o
f
i
t
&

L
o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004
Particulars

ToDepreciationonFurniture

Balance
Sheetas
on31st

March,
2004
Liabilities

Rs.

Rs.

F
L
54,000

1.1.11 Bad Debts

Debts which
cannot be recovered
arecalledbaddebts.
It is a loss for the
business.
Example: Thetrial
balance as on 31st
March 2004 shows,
Sundry

debtors

Rs.52,500. Adjustment:
Write off Rs. 2,500 as
baddebts.

A
dj
us
ti
ng
E
nt
ry

Rs.
6,000
Date
2004

Particulars

Mar31 BaddebtsA/c
ToSundrydebtorsA/c
(Baddebtswrittenoff)

To transfer bad
debts to Profit and
Loss account the
following transfer
entryisrequired.
Tr
an
sfe
r
En
try

Date

Particulars

2004
Mar31 Profit&LossA/c
ToBaddebtsA/c
(Baddebtstransferred
toProfit&LossA/c)

Baddebtswillbe
shown
1) onthedebit
side of
Profit and
Loss
accountand
2) on the
assets side
of the
Balance
Sheet by
way of
deduction
fromsundry
debtors.
P
r
o
f
i
t
&

Debit
Rs.

L.F
Dr

14

Credit
Rs.

2,500

2,500

15

o
s
s
A
c
c
o
u
n
t
forthe
year
ending
31st
March,
2004

Dr.

Particulars

Rs.

ToBaddebtsA/c

2,500

BalanceSheetason3
Liabilities

Rs.

Rs.

S
L

first deducted from

BadDebtsAccount the Sundry debtors
Dr.
then on the balance
Particulars
Rs.
amount (Sundry
ToSundrydebtorsA/c
2,500
debtors Bad debt
2,500
writtenoff)provision
for bad and doubtful
1.1.12 Provision for
debtscalculated.
Bad and Doubtful
Note:

Debts

Every business
suffers a percentage of
bad debts over and
above the debts
definitely known as
irrecoverableandwritten
off as Bad (Bad debts
written off). If Sundry
debtors figure is to be
shown correctly in the
Balance sheet provision
for bad and doubtful
debts must be adjusted.
This Provision for bad
and doubtful debts is
generally provided at a
certain percentage on
Debtors, based on past
experience.

While preparing
final accounts, the
baddebtswrittenoff
giveninadjustmentis

Example:The
trialbalanceshows
on31.3.2004,Sundry
DebtorsasRs.60,000.
Adjustment:
Provide5%provision
forbad&doubtful
debtsonSundry
debtors.
A
dj
us
ti
ng
E
nt
ry
Date

Particulars

2004
Mar31 Profit&LossA/c
ToProvisionforbad&
doubtfuldebtsA/c
(5%provisionforbadand
doubtfuldebts)

Provisionfor
badanddoubtful
debtswillbe
shown
1) onthedebit
side of
Profit and

Loss
Account
and
2)

on the assets
side of the
Balancesheet
by way of
deduction
from Sundry
debtors(after
Bad debts
written off if
any).

P
r
o
f
i
t
&

L
o
s
s
A
c
c
o
u
n

t
forthe
year
ending

31st
March,
2004

Dr.

Cr.
Particulars

Rs.

ToProvisionforbadand
doubtfuldebtsA/c

Particulars

Rs.

3,000

BalanceSheetason31stMarch,2004
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Sundrydebtors
60,000
Less:Provisionfor
badanddoubtful
debts
3,000
57,000
16

Example:The
TrialBalanceason
31stMarch2004
showsthefollowing:

17

ry
Date

SundryDebtors
Rs.81,200
Adjustment:
WriteoffRs.1,200as
baddebts.Createa
provisionforBadand
doubtfuldebts@5%
onSundryDebtors.
A
dj
us
ti
n
g
E
nt

Particulars

2004
Mar31 BaddebtsA/c
ToSundrydebtorsA/c
(Baddebtswrittenoff)

ProfitandLossA/c
ToProvisionforBad&doubtfu
(5%provisionforbad&doubtfu

Note: 5% should be
calculated

on
Rs.80,000 (i.e. The
amount ofSundry
debtors after writing
offBadDebts).
P
r
o
f

i
t

a
n
d

L
o
s
s

A
c
c
o
u
n
t

f
o
r

t
h
e

y
e
a

e
n
d
i
n
g

3
1
s
t

M
a
r
c
h
,

2
0
0
4
Dr.
Particulars
Rs.
ToBadDebtsA/c
1,200
ToProvisionforBad
&doubtfuldebtsA/c 4,000

Balance

Rs.

Sheetas
on31st
March,
2004
Liabilities

Rs.

Note:
B
a
d

D
e
b
t
s

A
c
c
o
u
n
t

Rs.

76,000

Dr.
Particulars
ToSundryDebtorsA/c

1.1.13 Provision for

Discount on
Debtors

To motivate the
debtors to make
prompt payments,
cashdiscountmaybe
allowed to them.
After providing
provisionforbadand

Rs.

1,200 B

doubtful debts, the

remainingdebtorsare
called as
good
debtors. They may
paytheirduesintime
and avail themselves
of the cash discount
permissable. So a
provisionfordiscount
ongooddebtorsata
certain percentage
may have to be
created.
Example: The
Trial Balance as on
31st March 2004
showsthefollowing:
Sundrydebtors
Adjustment:
Create2%
provisionfor
discounton
Debtors.
A
dj
us
tin
g
E
nt
ry

Date

Particulars

2004
Mar31 ProfitandLossAccount
ToProvisionfordiscount
onDebtors

(2%provisionfordiscountonD

P
r
o
f
i
t

a
n
d

L
o
s
s

A
c
c
o
u
n
t

f
o
r

t
h
e

p
e
r
i
o
d

e
n
d
e

3
1
s
t

M
a
r
c
h
,

2
0
0
4

Dr.
Particulars

Rs.

Rs.

Particulars

Rs.

Cr.
Rs.

ToProvisionfor
discountondebtors 900
18

Balanc
eSheet
on31st
March
2004
Liabilities

Rs.

19

debtors.
Note:

DebtorsasperTrialBalance
Less:Baddebts
AmountforwhichBad&dou
istobecalculated
Less:5%Provisionforbadan
Estimatedvalueofgooddebto
Less:2%Provisionfordiscou

Rs.

44,100

Example:The
trialbalance
showson
31.03.2004,
Sundr
y
debtor
sRs.
85,00
0
Adjustments:
Baddebtswrittenoff
Rs.5,000.Provide@
5%provisionforbad
and doubtful debts
and @ 2% provision
for discount on

A
d
j
u
st
i
n
g
E
n
t
ri
e
s
Date

Particulars


2004
Mar31 BaddebtsA/c
ToSundrydebtorsA/c
(Baddebtswrittenoff)

ProfitandLossA/c
ToProvisionforbadand
doubtfuldebtsA/c
(5%Provisionforbadand
doubtfuldebts)

ProfitandLossA/c
ToProvisionfordiscounton
debtorsA/c
(2%Provisionfordiscount
ondebtors)

Provisionfor
discounton
debtorswillbe
shown
1)

onthedebit
side of
Profit and
Loss
accountand

2)

on the asset
side of the
Balance
sheetbyway
of deduction
fromSundry
debtors
(after
deducting
bad debts
written off
and
provisionfor
bad and
doubtful
debts).
P
r

o
f
i
t

a
n
d

L
o
s
s

A
c
c
o
u
n
t

f
o
r

t
h
e

e
a
r

e
n
d
e
d

3
1
s
t

M
a
r
c
h
,

2
0
0
4
Dr.
Particulars
ToBaddebtsA/c
ToProvisionforBadand
doubtfuldebtsA/c
ToProvisionfor

Rs.
5,000
4,000

discountondebtors

1,520

L
b
d

Balance
Sheetas
on31st
March,
2004
Liabilities

Rs.

L
d
74,480

Rs.

21

Note:

e
b
t
s

A
c
c
o
u
n
t

Tr
an
sfe
r
E
nt
ry
Date

Particulars

2004
Mar31 Profit&LossA/c
ToBaddebtsA/c
(BaddebtsA/cclosedbytransfer
toProfit&LossA/c)

B
a
d

Dr.
Date

Particulars

Rs. D

2004

Mar31 ToSundryDebtorsA/c 5,000 M

5,000

1.1.14 Provision for

Discount on

Creditors

Similar to cash
discount allowed to
debtors,thefirmmay
have a chance to
receive the cash
discount from the
creditors for prompt
payment. Provision
for discount on
Creditors

is
calculatedatacertain
percentageonSundry
Creditors.
Example: The
Trial balance for the
year ended 31st
March, 2004 shows
Sundry Creditors
Rs.50,000.
Adjustment:

A
dj
us
ti
n
g
E
nt
ry
Date

Particulars

2004
Mar31 Provisionfordiscounton
creditorsA/c
ToProfitandLossA/c
(2%Provisionfordiscount
oncreditors)

Provisionfor
discounton
creditorswillbe
shown
1)

onthecredit
side of
Profit and
Loss
accountand

2)

on the
liabilities
side of the
Balance
sheet by

Createa
provisionfor
discounton
creditors@2%.

way of
deduction
from
Sundry
creditors.
P
r
o
f
i
t

a
n
d

L
o
s
s

A
c
c
o
u
n
t

o
r

t
h
e

y
e
a
r

e
n
d
e
d

3
1
s
t

M
a
r
c
h
,


2
0
0
4
Dr.
Particulars

Balance
Sheetas
on31st
March,
2004

Rs.

Liabilities
Sundrycreditors
Less:Provisionfor
discounton
creditors

Rs.

Rs.

Assets

50,000

1,000
49,000
22

23

Rs.

Rs.

Chartshowingthetreatmentofadjustments
inthepreparationofFinalAccounts
Sl. TypeofAdjustment
No.
1.

Closingstock

2.

24
3.

AdjustmentEntry

CreditsideoftheTradingA/c

Assetside.

OutstandingExpenses: RespectiveExpensesA/c Dr
(Wages,Rent,Salaries
ToRespectiveoutstanding
etc.)
expensesA/c
Example:
WagesA/c
ToWagesoutstandingA/c

i.Iftheoutstandingisanitem
chargeabletoTradingA/c,add
theoutstandingexpenseswith
relevantexpensesinthedebit
sideoftheTradingA/c.

Liabilitiesside.

SalariesA/c
Dr
ToSalariesoutstandingA/c

ii.Ifitisanitemchargeableto
ProfitandLossA/c,addthe
outstandingexpensestothe
relevantexpensesinthedebit
sideoftheProfitandLossA/c.

Respectiveprepaid
ExpensesA/c
ToRespective
ExpensesA/c

DebitsideofTrading&Profitand Assetsside.
LossA/cbywayofdeductionfrom
respectiveexpensesA/c.

PrepaidExpenses:
(InsurancePremium)

ClosingStockA/c
ToTradingA/c

Example:
PrepaidInsurance
PremiumA/c
ToInsurance
PremiumA/c

Dr

Howdealtwithin
TradingorProfitandLoss
Balance
Account
Sheet

Dr

Dr

25

4. AccruedIncome
(Commission)

AccruedIncomeA/c
Dr
ToRespectiveIncomeA/c
Example:
AccruedCommissionA/c
ToCommissionA/c

CreditsideofProfitandLossA/cby Assetsside.
wayofadditiontorespectiveIncome
A/c.

5. Incomereceivedin
advance(Rent)

RespectiveIncomeA/c
Dr
ToRespectiveIncome
receivedinadvanceA/c
Example:
RentreceivedA/c
Dr
ToRentreceivedin
advanceA/c

CreditsideofProfitandLossA/c
bywayofdeductionfromthe
respectiveincomeA/c.

Liabilitiesside.

6. InterestonCapital

InterestonCapitalA/c
ToCapitalA/c

DebitsideofProfitandLossA/c

Liabilitiesside
bywayof
additiontothe
Capital

Dr

InterestonDrawings

CapitalA/c
ToIntereston
drawingsA/c

Dr

CreditsideoftheProfitandLoss
A/c

Liabilitiesside
by way
of
additiontothe
drawings
which
are
ultimately
deductedfrom
theCapital.

8.

InterestonLoan
(InterestonBank
Loan)

InterestA/c
Dr
ToInterestOutstandingA/c
Example:
InterestonBankLoanA/c
ToInterestOutstandingA/c

DebitsideofProfitandLossA/c
bywayofadditiontothe
appropriateinterestA/c

Liabilitiesside
by way
of
additiontothe
particularloan
A/c

9.

InterestonInvestments AccruedInterest
oninvestmentsA/c
Dr
ToInterestreceivedA/c

CreditsideofProfitandLossA/c Assetssideby
bywayofadditiontothe
wayofaddition
appropriateinterestA/c.
totheparticular
investmentA/c

10.

DepreciationonFixed
Asset

DebitsideofProfitandLossA/c.

Assetssideby
wayofdeduc
tion from the
concernedas
setaccount.

DebitsideofProfitandLossA/c

Assetssideby
wayofdeduc
tion
from
Sundrydebtors

Dr

Dr

11.

Baddebts

BaddebtsA/c
ToSundrydebtorsA/c

12.

ProvisionforBadand
doubtfuldebts.

ProfitandLossA/c
Dr
ToProvisionforBad
anddoubtfuldebtsA/c

i.Iftheprovisionforbadand
Assetssideby
doubtfuldebtsisgivenoutside
wayofdeduc
theTrialbalance,thenitisshown tingNewProvi
onthedebitsideofProfitand
sionalonefrom
Lossaccount.
Sundrydebtors

27

ii.Ifprovisionforbadanddoubtful
debtsisgivenintheTrialBalance
(Old)andalsointheadjustment
(New):
Addnewprovisionforbadand
doubtfuldebtswithbaddebts
writtenoff.
a)Iftheoldprovisionforbadand
doubtfuldebtsislessthanthe
abovetotal,thenthedifference
willbeshownonthedebitsideof
theProfitandLossaccount.

iabilitiesside
ywayofde

Dr

fromSundrydebtors(afterdeductionofbaddebtsandnewprovisionforbadanddoubtfuldebts)

DepreciationA/c
ToFixedAssetA/c
Example:
DepreciationA/c
ToMachineryA/c

ssetssideby
ayofdeduc

26

7.

28
Dr

ProvisionforDiscount ProfitandLossA/c
Dr
onDebtors
ToProvisionfordiscount
ondebtorsA/c

14. ProvisionforDiscount ProvisionforDiscount

onCreditors
onCreditorsA/c

13.

CreditsideofProfitandLossA/c

DebitsideofProfitandLossA/c
(Amountofprovisionfordiscount
isascertainedongooddebtors)

b)Iftheoldprovisionforbadanddoubtfuldebtsismorethantheabovetotal,thenthedifferenceshouldbeshownonthecreditsideoftheProfitandLossaccount.

Format:
TradingandProfitand
LossAccountof
Thiru............fortheyearending
31stMarch,.........

Dr.

Cr.
Particulars

Rs. Rs.

ToOpeningstock
ToPurchases
Less:Purchasesreturns

xxx
xxx
xxx
xxx

ToWages
Add:Outstandingwages

Particulars

Rs. Rs.

BySales

xxx

Less:Salesreturns

xxx

ByClosingStock

xxx
xxx

xxx
xxx
xxx

ToFactoryrent
xxx
Less:PrepaidFactoryrent xxx
xxx
xxx

ToGrossProfitc/d
(TransferredtoProfit&
LossA/c)

xxxx
ByGrossProfitb/d
xxx
(Transferredfrom
xxx
TradingA/c)
xxx
ByCommissionreceived xxx
Add:Commission
xxx
accruedbutnotyet

ToSalaries
xxx
Add:OutstandingSalaries xxx
Insurancepremium
Less:PrepaidInsurance
Premium

xxxx

xxx
xxx

ToInterestonCapital
ToInterestonloan
Add:Interestonloan
outstanding

xxx
xxx

xxx

received

xxx
xxx

ByRentreceived
Less:Rentreceivedin
advance

xxx
xxx

ByInterestondrawings

xxx
xxx

29
ToDepreciationon:

ByDiscount
received
ByNewprovision
for

xxx

FixedAssets,
Buildings,
Machinery,
Furnitureetc.
ToBadDebts

discountoncreditors xxx
(giveninadjustment)
Less:Oldprovision xxx

xxx

Add:NewBadDebts xxx
(givenin
adjustment)
xxx
Add:NewProvision
for
bad&doubtful
debts
xxx
(givenin
adjustment)
xxx
Less:OldProvision xxx

xxx

xxx
xxx

ToDiscountallowed
ToNewProvision
for
discounton
debtors
xxx
(givenin
adjustment)
Less:OldProvision xxx

xxx
xxx

ToNetprofit
(Transferredto
CapitalA/c)

xxx

xxx

BalanceSheetofThiru.............ason31stMarch,.............
Liabilities

Rs. Rs.

Capital
Add:NetProfit
(or)
Less:NetLoss

xxx
xxx

xxx

Less:Drawings

xxx

xxx

Assets
CashinHand
CashatBank
Sundrydebtors
Less:Baddebts
writtenoff
30
Less:ProisionforBad&

Rs.

Rs.
xxx
xxx

xxx
xxx
xxx

Interestondrawings xxx

Less:Incometax

doubtfuldebts
xxx
xxx
xxx

xxx
xxx

Less:Provisionfor
discountondebtors

xxx

LandandBuildings
Less:Depreciation

xxx
xxx

xxx Plant&Machinery
Less:Depreciation

xxx
xxx

xxx
SundryCreditors
Less:Provisionfor
DiscountonCreditors
Loan
Add:Interestonloan
outstanding

xxx

xxx

xxx
xxx

xxx

xxx
xxx

OutstandingExpenses
Incomesreceivedin
advance

Furniture
xxx Less:Depreciation
xxx
Goodwill
xxx Less:Writtenoff

xxx
xxx
xxx
xxx
xxx

Closingstock
Prepaidexpenses
AccruedCommission
xxxx

xxx
xxx
xxx
xxx
xxxx

2.2 Preparation of Final Accounts

Illustration:1
Passnecessaryadjustmententriesforthefollowingadjustments:

1.
2.
3.
4.
5.
6.

SalariesoutstandingRs.20,000
PrepaidInsuranceRs.400
InterestaccruedoninvestmentsRs.1000
CommissionreceivedinadvanceRs.2,000
Toprovide10%interestoncapitalofRs.5,00,000
ClosingStockRs.4,00,000
31

Solution:

ToCommissionreceivedin
advanceA/c
(Commissionreceivedinadvance)

Adjustment
Entries
Date

Particulars

L.F.

SalariesA/c
Dr
ToSalariesoutstandingA/c
(Salariesoutstanding)

2.

PrepaidInsuranceA/c
ToInsuranceA/c
(Insuranceprepaid)

20,000

3.

AccruedInterestA/c
Dr
ToInterestA/c
(Interestaccruedoninvestments)

1,000

CommissionreceivedA/c

2,000

Dr

Dr

InterestonCapitalA/c
ToCapitalA/c
(10%interestoncapital)

Dr

50,0

6.

ClosingStockA/c
ToTradingA/c
(Closingstockrecorded)

Dr

4,00,0

Debit
Rs.

1.

4.

5.

Illustration:2
Passnecessaryadjustingentriesfor
thefollowingadjustments:

1.

Interest charged on drawings

Rs.5,000

2.

Interest on loan outstanding

Rs.3,000

3.

Depreciation at 10% is to be
charged on Machinery
Rs.3,00,000.

4.

WriteoffbaddebtsRs.2,000

5.

To provide provision for Bad

& doubtful debts at 2% on
SundrydebtorsRs.60,000

6.

To provide Provision for

discountoncreditorsat2%on
Sundry Creditors worth
Rs.1,00,000

Solution:
Journal
Entries

Date

Particulars

Debit
Rs.

L.F.

1.

CapitalA/c
Dr
ToInterestondrawingsA/c
(Interestchargedondrawings)

5,000

2.

InterestonloanA/c
Dr
ToInterestoutstandingA/c
(Interestdueonloan)

3,000

3.

DepreciationA/c
ToMachineryA/c
(DepreciationonMachinery)

Dr

30,000

4.

BaddebtsA/c
ToSundrydebtorsA/c
(Baddebtswrittenoff)

Dr

2,000

5.

ProfitandLossA/c
Dr
ToProvisionforBad&doubtful
debtsA/c
(2%provisionforBad&
doubtfuldebts)

6.

Credit
Rs.

5,000

3,000

30,000

2,000

1,200
1,200

Provisionfordiscounton
creditorsA/c
Dr
ToProfit&LossA/c
(2%provisionfordiscounton
Creditors)

2,000

32

Illustration:3

2,000

33

TheTrialBalanceason31stMarch
2004showsSundrydebtorsas
Rs.12,000andbaddebtsasRs.300.

Baddebtswrittenoff
Adjustment:WriteoffRs.800/asbad
debts.
Solution:

Noadjustmentgiven.

Adjusting
Entry

Solution:
ProfitandLossAccountfor
theyearended31stMarch2004

Dr

Particulars
ToBadDebts

Rs.

Particulars

300

BalanceSheetason31stMarch2004
Liabilities

Rs.

Assets
Sundrydebtors

Illustration:4
TheTrialBalanceason31stMarch
2004showsthefollowing:

SundryDebtors

1,400

Dr.
40,800

Date

Particulars

BaddebtsA/c
ToSundrydebtorsA/c
(baddebtswrittenoff)

L.F.

Dr.

Debi
Rs.

Note:
In the above example, Trial
Balance shows Rs.1,400 as Bad debts.
Thismeansthedoubleentryinrespect
of Rs.1,400 i.e.debiting Bad debts and
crediting Sundry debtors is already
completed.HenceRs.1,400foundinthe
TrialBalancewillnotaffectthesundry
debtorsofRs.40,800.
But for the adjustment given
outsidetheTrialBalance,theadjustment
hastobedoneafterthepreparationof
Trial Balance and this would result in
increasing bad debts by Rs.800 and
decreasingdebtorsbyRs.800.
Profit
andLoss
Account
forthe
year
ending
31st
March
2004
Dr.

Particulars
ToBadDebts
Add:Baddebts
Writtenoff

Rs.
1,400

Rs.

Particulars

800
2,200

BalanceSheetason31st
March2004
Liabilities

Rs.

Rs.

Assets
SundryDebtors 40,800
Less:Baddebts
writtenoff

Note:
BadDebtsAccount

Dr.

Particulars

Rs.

ToBalanceb/d
ToSundryDebtors

Cr.

Particulars

Rs.

1,400 ByProfit&Loss
800
2,200

2,200

34

Illustration:5

2,200
35

Applytherule:

The following items are found in

the Trial Balance of Mr.Vivekanandan
ason31stMarch2004.
Sundrydebtors

Rs.

Baddebts

Rs.

ProvisionforBad&doubtful
debts

Rs.

Adjustment:

Give necessary entries and show

howtheseitemswillappearinthefinal
accounts.
Solution:
Step :1

Transfer
Entry
Particulars

L.F.

Debit
Rs.

2004
Mar31 Provisionforbad&doubtful
debtsA/c
Dr.
ToBaddebtsA/c
(Transferofbaddebts)

Note:
IfProvisionforbadanddoubtfuldebts
accountismaintained,thelossonaccount
of bad debts is taken to Profit and Loss
Account not directly but via provision for
badanddoubtfuldebtsaccount.

Baddebts
Add:NewProvisionrequired
5%on64,000
Totalrequired
Less:Existingprovision
Amountrequired
Adjusting
Entry

Provideforbad&doubtfuldebtsat
5%onSundrydebtors.

Date

Step 2:

1,200

Rs.
1,200
3,200
4,400
2,800
1,600

Date

Particulars

L.F.

Debit
Rs.

2004
Mar31 ProfitandLoassA/c
Dr.
ToProvisionforbadand
doubtfuldebtsA/c
(Additionalprovisionforbad
anddoubtfuldebts)

Credit
Rs.

1,600
1,600

ProfitandLossAccountfor
thePeriodended31stMarch2004
Dr.

Cr.
Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

ToProvisionforbad&
doubtfuldebtsA/c
Baddebts
1,200
Add:Newprovision

3,200
4,400

Less:Oldprovision

2,800
1,600
36

BalanceSheetason31st
March2004
Liabilities

Rs.

Rs.

37

Assets
Debtors
64,000
Less:Provision
forBad&doubt
fuldebts(New)

Note:
When the existing provision is
larger than what is required even after
the transfer of bad debts, the second
stepwillgiveanegativefigure,which
indicates that the profit and loss
account is to be credited with the
excess.
Illustration:6
Following are the balances
extracted from the Trial Balance of
Mr.Mohanason31stMarch,2002.
TrialBalanceason31st
March,2002
Particulars

Debit

Rs.
Sundrydebtors
Baddebts

60,000
5,000

Provisionforbad&doubtfuldebts

Adjustment
Createprovisionforbad&doubtful
debts@5%onSundryDebtors.
Passadjustingentryandshowhow
these items will appear in the final
accounts.

Solution:
Adjusting
Entry
Date

Particulars

2002
Mar31ProvisionforBadandDoubtful
debtsA/c
Dr
ToProfit&LossA/c
(Excess:5%Provisionforbadand
doubtfuldebts)

L.F.

Debit
Rs.

2,000

ProfitandLossAccountfor

theyearending31stMarch,20029

Dr.

Particulars

Rs.

Rs.

Cr.

Particulars

Rs.

Rs.

ByProvisionfor
badanddoubt
fuldebts:
OldProvisionfor
bad&doubtfuldebts
Less:Baddebts5000
NewProvision3000

10,000
8,000
2,000

BalanceSheetason31stMarch,2002
Liabilities

Rs.

Rs.

Assets

Rs.

Sundrydebtors

60,000

Less:NewProvision

Rs.

3,000
57,000

Illustration:7

38

39

Thefollowingbalanceshavebeen
extractedfromthetrialbalanceof
Mr.Ashokason31.3.2002.

Dr.

TrialBalanceofMr.Ashokas
on31stMarch,2002
Particulars
Debtors
Baddebts
Provisionforbad&doubtfuldebts
ProvisionforDiscountondebtors
Discountallowed

Adjustments:
1.

Writeoffadditionalbaddebts
Rs.4,800

2.

CreateProvisionof10%forbad&
doubtfuldebtsondebtors.

3.

Create Provision of 2% for

discountondebtors.

Showhowtheseitemswillappear
intheProfitandLossAccountand
BalanceSheet.
Solution:
ProfitandLossAccount
ofMr.Ashok

fortheyearending31st
March,2002

Debit
Rs.
2,01,200
9,400

18,600

Particulars

Rs.

ToProvisionforBad&
DoubtfuldebtsA/c
Baddebts

9,400

Add:Baddebts
writtenoff
Add:NewProvision

4,800
14,200
19,640

Rs.

Particulars

Less:Oldprovision

33,840
24,000

9,840

ToProvisionfor
discounton
debtors
Discountallowed 18,600
Add:Newprovision
3,535
22,135
Less:Oldprovision
1,200
20,935

BalanceSheetason31st
March,2002
Liabilities

Rs.

Rs.

Assets
Sundrydebtors
Less:Baddebts
writtenoff

2,01,200

1,96,400
Less:Newprovision
forbad&doubt
fuldebts
1,76,760
Less:NewProvision
fordiscounton
debtors

Illustration:8
Fromthefollowingtrialbalanceof
atrader,makeoutaTradingandProfit
andLossaccountandBalanceSheetas
on31stMarch,2000.

Particulars
Sales
Purchases

Debit

Credit

Rs.

Rs.

1,05,000
40
41

4,20,000

PrintingCharges
Wages

2,500
77,500

Salaries
OpeningStock
CarriageInwards
GeneralExpenses
TradeMarks
RatesandTaxes
Capital
Discountreceived
Loan
Buildings
Furniture
Machinery
Cash
Bank

12,500
2,25,000
8,800
26,250
5,000
2,500
1,74,800
1,250
1,75,000
2,00,000
25,000
50,000
1,000
30,000
7,71,050

7,71,050

Adjustments:
1.
2.
3.

TheclosingstockwasvaluedatRs.3,20,000.
OutstandingSalariesRs.10,000.
Prepaidrates&taxesRs.500.

Solution:
TradingandProfitandLossAccountfortheyearending31 stMarch,2000
Dr.

Cr.
Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

ToOpeningStock

2,25,000 BySales

4,20,000

ToPurchases

1,05,000 ByClosingStock

3,20,000

ToWages

77,500

ToCarriageinwards

8,800

ToGrossProfitc/d

3,23,700

(TransferredtoProfit
andLossA/c)
7,40,000
ToPrintingcharges

7,40,000

2,500 ByGrossProfitb/d

ToSalaries

12,500

Add:Outstanding

10,000

3,23,700

(Transferredfrom
TradingA/c)
22,500 ByDiscount

ToGeneralexpenses
ToRatesandTaxes
Less:Prepaid

26,250

received

1,250

2,500
500
2,000

ToNetProfit
(Transferredto
CapitalA/c)

2,71,700

3,24,950

3,24,950

BalanceSheetason31stMarch,2000
Liabilities

Rs.

Rs.

OutstandingSalary
10,000
Loans
1,75,000
Capital
1,74,800
Add:NetProfit
2,71,700 4,46,500

Assets

Rs.

Cash
Bank
ClosingStock
Prepaidrates&
taxes
Building
Furniture
Machinery
TradeMarks

1,000
30,000
3,20,000
500
2,00,000
25,000
50,000
5,000

6,31,500

6,31,500
42

Illustration:9

43

ThefollowingTrialBalancehas
beenextractedfromthebooksof
Mr.Bhaskaron31.03.2003.
TrialBalance
Particulars

Debit
Rs.

Machinery

40,000

CashatBank

10,000

CashinHand

5,000

Wages

10,000

Purchases

80,000

Stock(01.04.2002)

60,000

Sundrydebtors

40,000

BillsReceivable

29,000

Rent
InterestonBankLoan

4,000
500

Commissionreceived
GeneralExpenses
Salaries

12,000
7,500

Discountreceived
Capital
Sales
BankLoan
SundryCreditors
Purchasereturns
Salesreturns

Rs.

4,000
3,02,000

Adjustments:
1.

ClosingStockRs.80,000

2.

Interest on Bank loan not yet

paidRs.400

3.

Commission received in
advanceRs.1,000

PrepareTradingandProfitandloss
Accountfortheyearended31.03.2003
andBalanceSheetasonthatdateafter
givingeffecttotheaboveadjustments.
Solution:
TradingandProfitandLoss
Accountof
Mr.Bhaskarforthe
yearending31st
March,2003

Dr.

Cr.
Particulars

ToOpeningStock
ToPurchases
Less:Returns
ToWages
ToGrossProfitc/d

Rs.

Rs.

Particulars

60,000 BySales
80,000
Less:Returns
5,000 75,000 ByClosingstock
10,000
51,000

Rs.

Rs.

1,20,000
4,0001,16,000
80,000

(TransferredtoProfit
andLossA/c)
ToRent
ToInterestonBank
Loan
Add:Outstanding
ToGeneralExpenses
ToSalaries
ToNetProfit
(Transferredto
CapitalA/c)

1,96,000
4,000 ByGrossProfitb/d
(Transferredfrom
500
TradingA/c)
400
ByCommission
900
received
12,000 Less:Receivedin
7,500
advance
32,600
ByDiscount
received

1,96,000
51,000

3,000
1,000
2,000
4,000

57,000

57,000

BalanceSheetason31st
March,2003
Liabilities
SundryCreditors
BankLoan
Add:Outstanding
interestonloan

Rs.

Rs.

40,000
400

Commissionreceived
inadvance
Capital
90,000
Add:NetProfit
32,600

44

45

Assets

40,000 Cashinhand
CashatBank
Billsreceivable
Sundrydebtors
40,400 ClosingStock
Machinery
1,000

1,22,600
2,04,000

Illustration:10
The following are the balances
extractedfromthebooksofMrs.Suguna
ason31stMarch,2004.
DebitBalances

Drawings
CashatBank
Cashinhand
Wages
Purchases
Stock(31.03.03)
Buildings
Sundrydebtors

Rs.

CreditBalances

40,000 Capital
17,000 Sales
60,000 SundryCreditors
10,000
20,000
60,000
1,00,000
44,000

BillsReceivable
Rent
Commission
GeneralExpenses
Furniture
SuspenseAccount

29,000
4,500
2,500
8,000
5,000
5,000
4,05,000

Adjustments:
1.
2.
3.
4.
5.
6.

Closing Stock Rs.40,000

valuedason31.03.04.
InterestonCapitalat6%tobe
provided.
InterestonDrawingsat5%to
beprovided.
Depreciatebuildingsattherate
of10%perannum.
WriteoffBaddebtsRs.1,000.
WagesyettobepaidRs.500

PrepareTradingandProfit&Loss
AccountandBalanceSheetason31st
March2004.
Solution:
TradingandProfitandLoss
AccountofMrs.
Sugunafortheyear
ending31stMarh,
2004

Dr.

Cr.

Particulars
ToOpeningStock
ToPurchases
ToWages
Add:Outstanding

Rs.

10,000
500

ToGrossProfitc/d
(TransferredtoProfit
&LossA/c)

Rs.
Particulars
60,000 BySales
20,000 ByClosingStock

Rs.

10,500
1,09,500
2,00,000
4,500 ByGrossProfitb/d
2,500 (Transferredfrom
8,000 TradingA/c)
12,000 Byintereston
Drawings
10,000

ToRent
ToCommission
ToGeneralExpenses
ToInterestonCapital
ToDepreciationon
buildings
ToBaddebts
writtenoff
ToNetProfit
(Transferredto
CapitalA/c)

2,00,000
1,09,500
2,000

1,000
73,500
1,11,500

1,11,500

BalanceSheetofMrs.Sugunaas
on31stMarch,2004
Liabilities

Rs.

SundryCreditors
Outstandingwages
Capital
2,00,000
Add:NetProfit
73,500
2,73,500
Add:Intereston
Capital
12,000
2,85,500
Less:Drawings
40,000
2,45,500
Less:Intereston
Drawings
2,000

Rs.

46

47

Stockon1.4.2004
Purchases
Sales
Carriageinwards
Salaries
PrintingandStationery

Assets

45,000 Cashinhand
500 Cashatbank
BillsReceivable
SundryDebtors
Less:Baddebts
writtenoff

44,000

ClosingStock
Buildings
1,00,000
Less:Depreciation 10,000
Furniture
2,43,500 SuspenseAccount
2,89,000

Illustration:11
Mr.Senthils book shows the
followingbalances.PreparehisTrading
andProfitandLossaccountfortheyear
ended 31st March 2005 and Balance
Sheetasonthatdate.
Particulars

Rs.
1,60,000
40,000

Debit
Rs.

1,50,000
1,30,000
2,000
50,000
8,000
48

Drawings
SundryCreditors
Sundrydebtors
Furniture
Capital
Postage&Telephone
Interestpaid
Machinery
LoanAccount
SuspenseA/c

17,000
1,80,000
10,000
7,500
4,000
41,500

6,00,000

Adjustments:
1. ClosingStockRs.1,20,000
2. Provide5%forbad&doubtful
debtsondebtors
3. Depreciate machinery &
furnitureby5%
4. Allowinterestoncapitalat5%
5. Prepaid printing charges
Rs.2,000
Solution:
TradingandProfitandLoss
Accountof
Mr.Senthilforthe
periodending31st
March2005

Dr.

Cr.
Particulars

Rs.

ToOpeningStock
ToPurchases

Rs.

Particulars

Rs.

1,50,000 BySales
1,30,000 ByClosingStock

ToCarriageinwards

2,000

ToGrossProfitc/d
(Transferredto
Profit&LossA/c)

1,38,000

Rs.
3,00,000
1,20,000

4,20,000

4,20,000

49
ToSalaries
ToPrinting&
Stationery

8,000

Less:Prepaid

2,000

50,000 ByGrossProfitb/d
(Transferredfrom
TradingA/c)
6,000

ToPostage&
Telephone

7,500

ToInterestpaid

4,000

ToProvisionforBad
&Doubtfuldebts

9,000

ToDepreciationon:
Machinery
Furniture

2075
500
2,575

TointerestonCapital

12,500

ToNetProfit
(Transferredto
CapitalA/c)

46,425

1,38,000

BalanceSheetofMr.Senthilason31stMarch,2004
Liabilities
SundryCreditors
LoanAccount
Capital
Add:NetProfit
Add:Intereston
Capital
Less:Drawings

Rs.

2,50,000
46,425
2,96,425
12,500
3,08,925
17,000

Rs.

Assets

20,000 SundryDebtors
1,80,000
25,000 Less:Provisionfor
bad&doubtful
debts
Closingstock
PrepaidPrinting
charges
Furniture

10,000

SuspenseAccount

2,91,925 Less:Depreciation
5,000
Machinery
Less:Depreciation
3,41,925

Illustration:12
From the Trial Balance of
Mr.Raghuramanason31stMarch,2003
prepareFinalaccounts.

Particulars

Capital
Drawings
Stock(1.4.2002)
Purchases
Sales
SalesReturns
Wages
InsurancePremium
PackingExpenses
Postage
Advertisement
Carriageoutwards
Baddebts
Commissionreceived
BillsPayable
Bankoverdraft
Land&Buildings
Plant&Machinery
SundryDebtors
SundryCreditors

Debit

Credit

Rs.

Rs.

3,60,000
6,400
18,000
1,29,000
2,38,000
4,000
32,000
3,000
4,000
200
2,000
16,000
600
1,000
18,000
6,000
2,61,000
1,80,000
50,800
84,000
7,07,000
50

Adjustments:
1.

Closing Stock on 31.03.2003,

Rs.15,000.

2.

WriteoffbaddebtsRs.800and
make provision for Bad &
doubtful debts @ 5% on
Sundrydebtors.

3.

7,07,000

51
ToInsurance
ToPostage
ToAdvertisement
ToCarriageoutwards
ToBaddebts
Add:Baddebts
writtenoff

Commission accrued but not

receivedRs.2,000.

ToProvisionforbad
&doubtfuldebts
ToNetProfit
(Transferedto
CapitalA/c)

Solution:
TradingandProfitandLoss
Accountof
Mr.Raguramanforthe
2003
Dr.

ToOpeningStock
ToPurchase
ToWages
ToPackingExpenses
ToGrossProfitc/d
(Transferredto
Profit&LossA/c)

Rs.

Rs.

2,500
43,900

69,000

yearending31stMarch,

Particulars

2,49,000
3,000 ByGrossProfitb/d
200 (Transferredfrom
2,000 TradingA/c)
16,000 ByCommission
600
received
Add:Accrued
800
Commission
1400

Particulars

18,000 BySales
1,29,000 Less:Sales
32,000 Returns
4,000
66,000 ByClosingstock

2,38,000

BalanceSheetofMr.Raguraman
ason31stMarch,2003
Liabilities
SundryCreditors
BillsPayable
BankOverdraft
Capital
Add:NetProfit
Less:Drawings

Rs.

Rs.

Assets

84,000SundryDebtors
18,000Less:Baddebts
6,000writtenoff
3,60,00
43,900
4,03,900
6,400

Less:Provision
forBad&
Doubtfuldebts
3,97,500ClosingStock
AccruedCommission
Land&Buildings
Plant&Machinery
5,05,500

Illustration:13
From the following particulars of
Mrs.Sulochana, prepare Trading and
Profit and Loss Account and Balance
Sheet for the year ending 31st March,
2004.
TrialBalance

Particulars

Capital
Cash
Buildings
Salary
Rent&Taxes
OpeningStock
Machinery
Drawings
Purchases

Debit

Credit

Rs.

Rs.

7,50,000
40,000
4,00,000
1,10,000
21,000
1,20,000
1,20,000
40,000
5,00,000
52

53

Sales
Carriageinwards
Fuel,Gas
SundryDebtors
SundryCreditors
BillsReceivable
Dividend
Loan
Baddebts
Advertisement
ProvisionforBad&DoubtfulDebts

5,000
37,000
2,50,000

7,50,000

1,20,000
53,000
28,000
60,000
2,000
16,000
6,000
17,14,000

17,14,000

Adjustments:
1. ClosingstockRs.1,40,000.
2. WriteoffRs.10,000asbaddebts;Provide5%forBadandDoubtfuldebts.
3. MakeprovisionfordiscountonDebtorsat2%.
4. ProvisionfordiscountonCreditorsat2%.
Solution:
TradingandProfitandLossAccountofMrs.Sulochanafortheyearending31 stMarch,2004
Dr.

Cr.
Particulars

ToOpeningStock
ToPurchases
ToCarriageinwards
ToFuel,Gas
ToGrossProfitc/d
(TransferredtoProfit
&LossA/c)

Rs.

Rs.

Particulars

Rs.

Rs.

1,20,000 BySales
5,00,000 ByClosingStock
5,000
37,000
2,28,000

7,50,000
1,40,000

8,90,000

8,90,000

54
ToSalary
1,10,000 ByGrossProfitb/d
ToRent&Taxes
21,000 (Transferredfrom
ToAdvertisement
16,000 TradingA/c)
ToProvisionforbad
ByDividend
&doubtfuldebtsA/c
ByProvisionfor
Baddebts
2,000
discounton
Add:Baddebts
Creditors
writtenoff
10,000
12,000
Add:NewProvision 12,000
24,000
Less:OldProvision
6,000
18,000
ToProvisionfor
discountondebtors
4,560
ToNetProfit
88,840
(Transferredto
CapitalA/c)

2,28,000

28,000

2,400

2,58,400

2,58,400

BalanceSheetofMrs.Sulochanaason31stMarch,2004
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

SundryCreditors
1,20,000
Less:Provisionfor
discounton
creditors
2,400
Loan
Capital
Add:NetProfit

Less:Drawings

Cash
40,000
BillsReceivable
53,000
SundryDebtors
2,50,000
Less:Baddebts
1,17,600writtenoff
10,000
60,000
2,40,000
7,50,000
Less:NewProvision
88,840
forBad&doubtful
8,38,840
debts
12,000
Less:NewProvision 2,28,000
40,000

fordiscounton
7,98,840debtors

4,560

55

Incometax

11,73,4000

ClosingStock
Buildings
Machinery

56

9,76,440

Illustration:14
Prepare Trading, Profit and Loss
A/candBalanceSheetason31.3.2005
from the following Trial Balance of
Mr.Imran.
Particulars

Capital
BankOverdraft
Sales
Furniture
BusinessPremises
Creditors
OpeningStock
Debtors
Rent
Purchases
Discount
Insurance
Wages
Salaries
Advertisement
CarriageonPurchases
Provisionforbadanddoubtfuldebts
Baddebts

4,000

Debit
Rs.

30,600
1,20,000
1,32,000
1,08,000
6,60,000
16,000
24,000
54,000
13,200
10,800
800

Adjustments:
1. Closing Stock on 31.03.2005
wasRs.1,20,000
2. Make a provision of 5% on
Sundry debtors for bad and
doubtfuldebts.
3. Rent received in advance
Rs.2,000
4. Provide 10% depreciation on
FurnitureandBusiness
Premises.
Solution:
TradingandProfitandLoss
AccountofMr.Imran
fortheyearending31st
March,2005

Dr.

Cr.
Particulars

Rs.

ToOpeningStock
ToPurchases
ToWages
ToCarriageon
Purchases
ToGrossProfitc/d
(Transferredto
Profit&LossA/c)

Rs.

Particulars

Rs.

Rs.

1,32,000 BySales
6,60,000 ByClosingstock
24,000

9,03,000
1,20,000

10,800
1,96,200

10,23,000
ToInsurance
16,000 ByGrossProfitb/d
ToSalaries
54,000 (Transferredfrom
ToAdvertisement
13,200 TradingA/c)
ToDepreciationon:
ByRent
Furniture
3060
Less:Received
BusinessPremises 12,000
inadvance
15,060
ToNetProfit
1,05,140 ByDiscount
(Transferredto
ByProvisionforbad
CapitalA/c)
&doubtfuldebts
OldProvision
Less:Baddebts800
NewProvision5400

10,23,000
1,96,200

6,000
2,000

7,000
6,200

2,03,400
57

SundryCreditors
BankOverdraft
Rentreceivedin
advance
Capital
Add:Netprofit
Less:IncomeTax

Rs.

Rs.

Assets

79,800 SundryDebtors
1,08,000
25,200 Less:NewProvision
forbadanddoubtful
2,000 debts
1,50,000
1,05,140
2,55,140
4,000

ClosingStock
Furniture
Less:Depreciation

30,600

2,51,140
BusinessPremises 1,20,000
Less:Depreciation
12,000
3,58,140

Note:
TotalofBaddebtswrittenoffand
newprovisionforbadanddoubtfuldebts
is (Rs.800 + Rs.5,400) Rs.6,200. Old
provisionforbadanddoubtfuldebtsgiven

800
2,03,400

intheTrialBalanceisRs.7,000whichis
greaterthanRs.6,200.Sothedifference
will appear on the credit side of of the
ProfitandLossaccountasfollows:

BalanceSheetofMr.Imranas
on31stMarch,2005
Liabilities

4,000
2,400

Oldprovision

Rs.7

Less:Totalofbaddebtsandnew
provision for bad and
doubtfuldebtsRs.6,200
(Rs.800+Rs.5,400)
Rs.800

QUESTIONS

________account.
9. Interestonloanborrowedunpaidis
shownonthe________sideofthe
Balancesheet.
10. Depreciation is deducted from the
concerned________intheBalance
sheet.
11. ProvisionforBadandDoubtfuldebts

I.Objective type:
a)Fillintheblanks:
1.

2.

3.

4.
5.

6.

7.
8.

Net Profit is transferred from Profit

andlossaccountto________

account.
Closing stock is valued at Cost
Priceor________pricewhichever
islower.
Outstandingexpensesareshownon
the ________ side of the balance
sheet.
Prepaidexpensesareshownonthe
________sideofthebalancesheet.

intheBalancesheet.
12. Provisionfordiscountoncreditors
is deducted from ________in the
Balancesheet.
13. Debts which are not recoverable
fromSundrydebtorsaretermedas
________.

Incomeaccruedbutnotreceivedwill
beshownonthe________

(Answers: 1. Capital, 2. Market, 3.

Liabilities,4.Assets,5.Assets,
6.Liabilities,7.Profit&Loss
A/c., 8.Profit and Loss
Account, 9. Liabilities, 10.
Fixed asset, 11. Sundry
debtors, 12. Sundry creditors,
13.Baddebts).

sideoftheBalancesheet.
Incomereceivedinadvancewillbe
shownonthe________sideofthe
Balancesheet
Interest on capital is debited in
________account
Interestondrawingsiscreditedin
58

b)Choosethecorrectanswer:
1.

isdeductedfrom________

Returnsinwardsaredeductedfrom
a)Purchases
b)Sales
c)

59

sheet
3) Noneoftheabove.
5.

Returnsoutward

2.

account

The Profit

c)Tradingaccount

and Loss
account

6.

shows a)
Financial

c)Noneoftheabove
7.

concern

b)NetprofitorNetloss c)Gross
profitorGrossLoss
Rentoutstandingis
a)aliability
b)anasset

Closingstockisshownin
1)Profitandlossaccount
2) Trading account and Balance

Interestoncapitalisaddedto
a)ExpenseA/c b)IncomeA/c c)
CapitalA/c

8.

c)

anincome

4.

GrossProfitistransferredto
a)Capitalaccount
b)Profit
andlossaccount

positionof
the

3.

Openingstockisshownin
a)Balancesheet b)ProfitandLoss

Interest on drawings is deducted

from
a)IncomeA/c b)CapitalA/c c)
ExpenseA/c

9.

Outstanding interest on loan

borrowedistobeaddedto
a)AssetA/c
b)IncomeA/c c)
LoanA/c

10. Alltheitemsgivenintheadjustment
will appear at _________ in the
Finalaccounts.
a)Threeplaces b)Twoplaces c)
OnePlace

II.Other Questions :

(Answers:1.(b);2.(b);3.(a);4.(b);5.
(c);6.(b);7.(c);8.(b):9.(c);
10.(b))

1.

Whatisoutstandingexpense?

2.

Whatisprepaidexpense?

3.

Whatisaccruedincome?

4.

What is income received in

advance?

5.

Whatisbaddebt?

6.

Write notes on Provision for bad

andDoubtfuldebts.

7.

Write notes on Provision for

discountonDebtors.

8.

Write notes on Provision for

discountonCreditors.

9.

Whatisadjustingentry?

10. Writenoteson
a)TradingAccount

b)Profit

andlossaccountand

3)Balancesheet.
III.Problems:

1.

Pass necessary adjusting entries for

thefollowingadjustments:

1)
2)
3)
4)
5)
6)
2.

ClosingstockRs.6,00,000.
Provide6%interestoncapital
ofRs.16,00,000
RentreceivedinadvanceRs.
5,000
Interest accrued on
investmentsRs.2,000
Insurance premium prepaid
Rs.1,000
Wages outstanding Rs.
15,000.

Pass necessary adjusting entries for

thefollowingadjustments:

1)
2)
3)
4)

Interest on drawings Rs.

10,000.
Interest on loan outstanding
Rs.5,000.
Depreciation at 5% on
furnitureRs.50,000.
Write off bad and doubtful
debtsRs.3,000.

60

61

5)

6)

3.

Provideprovisionforbadand
doubtful debts at 5% on
SundrydebtorsRs.4,00,000.
Provideprovisionfordiscount
oncreditorsat2%onSundry
creditorsRs.3,50,000.

Giveadjustingentryandtransferentryfor
thefollowingadjustments:

1)
2)
3)

InterestondrawingsRs.5,000.
Depreciation on machinery
Rs.4,000.
WriteoffbaddebtsRs.2,000.

4.

The value of closing stock shown

outsidetheTrialBalance(31.3.05)
isRs.2,50,000.Passadjustingentry.
Showhowthisitemwillappearin
theFinalaccountsason31.3.05.

5.

TrialBalance(31.3.05)showssalaries
paid Rs.1,50,000. Salary for March
2005 Rs.4,000 not yet paid. Pass
adjustingentryandshowhowthisitem
willappearintheFinalaccounts.

6.

TrialBalanceason31.3.05shows
Rs.40,000 as Insurance premium
paid.Unexpiredinsurancepremium
Rs.5,000.Passadjustingentryand
showhowthisitemwillappearin
theFinalaccounts.

7.

CreditsideofTrialBalanceason
31.4.05 shows Commission
received Rs.10,000. Commission
accrued but not yet received
Rs.4,000.Pass adjustingentry and
showhowthisitemwillappearin
theFinalaccounts.

8.

Trial balance as on 31.3.05 shows

Rent received Rs.30,000. Rent
received in advance Rs.6,000. Pass
adjusting entry and show how this
item will appear in the Final
accounts.

9.

As per Trial Balance (31.3.05)

capital isRs. 6,00,000. Provide 6%
interestoncapital.Passadjustingand
transferentries.Showhowthisitem

willappearintheFinalaccounts.

10. The Trial Balance shows the

followings
Capitalason31.3.03

Rs.6,00,000

Drawingason31.3.03

Rs.50,000

Rs.10,000. Rent received in

Chargeinterestondrawings@5%.Passadjustingandtransfer advance is Rs.1,000. You are
entry.ShowhowthisitemwillappearintheFinalaccounts. requiredtoshowhowitappearsin
the Profit and Loss account and
11. TheTrialBalance(31.3.04)showsthefollowing:
Balancesheet.
(June2002)
Dr.
Bankloan@10%(1.4.03)
Rs.10,00,000
14. Howwillthefollowingadjustment
appear in the Balance sheet as on
Interestpaid
Rs.60,000
31.3.2000.
Provideinterestoutstanding.Passadjustingentryandshowhow
Sundrydebtors
R 21,00
thisitemwillappearintheFinalaccounts.
Baddebtstobewrittenoff
Rs. 1,00
12. Thetrialbalanceshowsthefollowingason31.3.98.
Adjustment:Provide@5%
Capital
Rs. 5,00,000
provisionforBadandDoubtfuldebts
Drawings(1.7.97)
Rs.
50,000
and@2%Provisionfordiscounton
Chargeinterestondrawings@5%.Passadjustingandtransfer Debtors.
entry.ShowhowthisitemwillappearintheFinalaccounts.
(Answer:
Rs.18,620
March
13. Rent received shown in the Trial
2003)
Balance as on 31st March 2001,
62

63

15. CommissionreceivedgiveninTrial
Balance is Rs.1,000 as on 31st
March 1994. Commission accrued
butnotyetreceivedRs.150.Show
theadjustingentry.
(June2003)
16. TheTrialBalanceshowsthevalue
of machinery on 31.3.04 as
Rs.50,000. Machinery is to be
depreciated at 10%. Pass
adjustmententryandshowhowthis
item will appear in the Final
accounts.
17. TheTrialBalanceason31stMarch2003
show Sundry debtors Rs.60,000. Write
off bad debts Rs.4,000. Pass adjusting
andtransferentry.Showhowthisitem
willappearintheFinalaccounts.

18. The Trial Balance shows on

31.3.2002, Sundry debtors
Rs.1,50,000.Provide5%provision
for bad and doubtful debts on
Sundry debtors. Pass adjusting
entryandhowthisitemwillappear
intheFinalaccounts.

19. The Trial Balance shows on

31.3.2002, Sundry debtors
Rs.1,25,000.
Adjustment:
1. Bad debts to be written off
Rs.5,000.
2. Provide@5%Provisionforbad
anddoubtfuldebtsand
3. Provide @ 2% Provision for
discountondebtors.
Passentriesandshowhowthese
itemswillappearintheFinal
accounts.
20.TheTrialBalanceason31stMarch
2003shows.
Sundrydebtors

90,000

Adjustment:Create2%Provision
fordiscountonDebtors.
PassJournalentryandshowhow
thisitemwillappearintheFinal
accounts.

21. The Trial Balance shows sundry

creditors at Rs.10,000 on
31.3.2000.

Buildings
Machinery
Furniture
MotorCar
Purchases
Salesreturns
SundryDebtors
GeneralExpenses
CashatBank
RatesandTaxes
BadDebts
Insurancepremium
Discountallowed
Openingstock

Adjustment:Itisdesiredtomakea
provision for discount on Sundry
creditorsat2%.
You are required to show how it
appearsinProfitandLossaccount
andBalancesheet.
(March
2002)
22. ThefollowingistheTrialBalance
extracted from the books of
Mr.Kumarason31.3.96.

3,33,200

Adjustments:

Prepare Trading and Profit and

LossaccountandBalancesheeton
31.3.96.
DebitBalances

Rs.

MaintainProvisionforbadand
doubtful debts at 5% on
debtors.

4)

DepreciateMotorcarby10%.,
Furnitureby4%andBuildings
by3%.
Stockon31.3.96Rs.20,000.

5)

1)

CreditBalances

3)

(
M
o
d
i
f
i
e
d

:
M
a
r
c
h
,

2
0
0

30,000 Capital
31,400 Purchasereturns
2,000 Sales
16,000 SundryCreditors
1,88,000 Discountreceived
1,000 Provisionforbadand
30,000 doubtfuldebts
1,600
9,400
1,200
400
800
1,400
20,000

64

2)

Outstanding rates and taxes

Rs.1,600.
Insurance Premium Prepaid
Rs.200.

65

0
)
(Answer:G.P.Rs.93,000;N.P.Rs.
83,720;B/sRs.1,34,920)

23. From the undermentioned Trial

Balance of Mr.Saleem as on
31.3.2001, prepare Trading and
Profit and Loss Account and
Balancesheetasonthatdate.
TrialBalance
DebitBalances
CashinHand
Purchases
Openingstock
SundryDebtors
PlantandMachinery
Furniture
BillsReceivable
RentandTaxes
Wages
Salaries

Rs.
1,500
1,20,000
40,000
60,000
50,000
20,000
15,000
10,000
16,000
20,000

CreditBalances
Capital
Bankloan@4%
Billspayable
SundryCreditors
Sales
Provisionforbad&
doubtfuldebts
Interest

3,52,500

Additionalinformationsupplied:
1)

ClosingstockRs.50,000.

2)

Provide for outstanding

liabilities.
Rentandtaxes
Rs.2,000.
Wages
Rs.3,000.
Salaries
Rs.4,000.

3)

Depreciation on Plant and

Machinery @5% and on
furniture@10%.

4)

Provide 4% interest on Bank

loan.

5)

WriteoffbaddebtsRs.2,000.

(Answer:G.P.Rs.71,000;N.P.
Rs.30,200;B/sRs.1,90,000)

24.TrialBalanceofAnuradhaAgencies
ason31.03.2001:
DebitBalances
Drawings
Buildings
Furniture&Fittings
Computer
Interestonloan
Loosetools
Purchases
Stockon1.4.2000
GeneralExpenses
Freightinward
Freightoutward
SundryDebtors
Bank
Goodwill

Rs.

CreditBalances

1,800 Capital
15,000 GeneralReserve
7,500 LoanfromHari@6%
25,000 Sales
900 Commissionreceived
6,100 SundryCreditors
75,000
25,000
15,000
2,000
1,000
28,000
20,200
10,000
2,32,500

Adjustments:

66

ClosingstockisRs.32,000.

2)

Depreciate Computer @10%.;

Buildings @ 5%.; Furniture
andFittings@10%

3)

Provide for bad and doubtful

debts @ 5% and for discount
ondebtors@2%.

67

25.TrialBalanceofMr.Veluason31st
March1994.

iv) Provideinterestondrawings@6%
andonCapital@8%.

Preparefinalaccountsforthesaid
periodaftergivingeffecttothe
adjustments.

Particulars

Debit
Rs.

Capital

(
October2002)(Answer:G.P.
Rs.30,000;N.P.Rs.8,376;B/sRs.
1,37,868)

1)

Drawings

3,600

Buildings

30,000

Furniture&Fittings

15,000

Computer

50,000

LoanfromMr.Raviat6%
InterestonLoan

1,800

Adjustments:
1)

ClosingstockRs.64,000.

2)

Depreciate computer at 10%;

Buildings at 5%,; Furniture
andFittingsat10%

3)

Provide for Bad and doubtful

Debtsat5%andforDiscount
onDebtorsat2%.

4)

ProvideinterestonDrawingsat
6%andonCapitalat6%.

Sales
Loosetools
Purchases

32,200
1,50,000

Stockon1.4.94

50,000

GeneralExpenses

30,000

Freightinward

4,000

Freightoutward

2,000

Commissionreceived
SundryDebtors

56,000

Bank

40,400

PrepareTradingandprofitandLoss
AccountandBalancesheetason
31stMarch,1994.
(Octob
er
1994)

SundryCreditors
4,65,000

(Answer:G.P.Rs.60,000;N.P.
Rs.17,552;B/sRs.2,75,736)

26. The following balances have been

extracted from the books of
Mrs.Padmaason31stMarch,2002.

DebitBalances
Furniture
CashinHand
OpeningStock
Purchases
Investments@10%
Drawings
Baddebts
Salaries
Carriageinwards
Insurance
Rent
Debtors
Advertising
Printing&Stationery
GeneralExpenses

Rs.
30,000
8,000
1,00,000
3,20,000
20,000
60,000
12,000
60,000
20,000
12,000
26,000
1,80,000
40,000
12,000
15,500

CreditBalances
Capital
Commission
Sales
Creditors
Interest

2,00,000
14,000
6,00,000
1,00,000
1,500

9,15,500

9,15,500

Thefollowingadjustmentsaretobe
made:
1. Closing stock was valued at
Rs.80,000.
2. Provideforaccruedintereston
investmentsRs.500.
3. Commission received in
advanceRs.4,000.
4.

A provision for Bad and

DoubtfulDebtsistobecreated
totheextentof5%onSundry
Debtors.

5.

A provision for discount on

Sundry creditors is to be
createdtotheextentof2%on
Sundrycreditors.

68

69

(Answer:G.P.Rs.2,40,000;N.P.Rs.
67,500;B/sRs.3,09,500)

27. The TrialBalanceofMrs.Kalpana

shows the following balances on
March31,2001.
DebitBalances
Purchases

Rs.

Rs.

CreditBalances

1,40,000 Capital

SalesReturns

10,000 Sales

OpeningStock

40,000 Discountreceived

Discountallowed

4,000 Commissionreceived

Bankcharges

1,000 SundryCreditors

Salaries

9,000

Wages

10,000

Freightinwards

8,000

Freightoutwards

2,000

Rent,Rates&Taxes

10,000

Advertising

12,000

Cashinhand

2,000

Plant&Machinery

1,00,000

SundryDebtors

1,20,000

CashatBank

1,40,000
6,08,000

Adjustment:TheClosingstock
wasvaluedatRs.60,000.
YouarerequiredtopreparetheProfit
andLossAccountfortheyearending31st
March2001andtheBalanceSheetason
thatdate.
(Answer:G.P.Rs.1,52,000;N.P.Rs.
1,24,000;B/sRs.4,22,000)

28. From the following Trial Balance

ofMr.Joseph,prepareTradingand
Profit and Loss Account for the
yearended31st March,2003anda
BalanceSheetasonthatdate.
TrialBalance
Particulars

Capital
Sales
Purchases
Salaries
Rent
InsurancePremium
Drawings
Machinery
Bank
Cash
Stock(1.4.2002)
SundryDebtors
SundryCreditors

Debit
Rs.

45,000
6,000
4,500
900
15,000
84,000
13,500
13,500
15,600
7,500
2,05,500

Adjustmentsrequired:

1. Stockon31.3.2003
2. Salariesunpaid
3. Rentpaidinadvance Rs.
750
4. Create 5% Provision for bad
and
doubtfuldebtsonSundry
debtors.
(Answer:G.P.Rs.29,100;N.P.Rs.
17,075;B/sRs.1,33,575)

Rs.
Rs.
70

71

3.
4.
5.

30. The following are the balances

extracted from the books of
Mrs.Nandhiniason31.03.2002.
DebitBalances

Debit

Particulars

Sales
Wages
InsurancePremium
Salaries
SundryCreditors
SundryDebtors
BillsPayable

Rs.

16,500
16,000

2,500
1,00,000
80,000
3,00,000
50,000
1,000
15,000

Drawings
CashinHand
CashatBank
Wages
Purchases
Stock(1.4.2001)
Buildings
SundryDebtors
BillsReceivable
Rent
Commission
GeneralExpenses
Furniture

Rs.

CreditBalances

40,000 Capital
17,000 Sales
65,000 SundryCreditors
10,000
20,000
60,000
1,00,000
44,000
29,000
4,500
2,500
8,000
5,000
4,05,000

Adjustments:
1.
2.

1,50,000

3.

7,31,000

4.
5.

Adjustments:
1.
2.

Create provision for Bad and

doubtfuldebts@5%
Create provision for discount
ondebtors@2%
Create provision for discount
oncreditors@2%

(Answer:G.P.Rs.1,50,000;N.P.
Rs.1,00,530;B/sRs.3,03,530)

29. The following balances are

extracted from the books of
Mr.Venugopal as on 31st March
2004. Prepare Trading, Profit and
Loss Account and the Balance
Sheet.

Capital
Generalexpenses
Drawings
Commission
BankOverdraft
CashinHand
Stock(1.4.2003)
Furniture
Purchases

14,700
1,000

ClosingstockRs.40,000
InterestonCapitalat6%tobe
provided.
InterestonDrawingsat5%to
beprovided.
WagesyettobepaidRs.1,000
RentPrepaidRs.900

PrepareTradingandProfitandLoss
AccountandBalancesheetason
31.3.2002.

ClosingStockRs.1,00,000
WriteoffbaddebtsRs.20,000

(Answer:G.P.Rs.1,09,000;N.P.
Rs.84,900;B/sRs.3,00,900)
72

31. FromthefollowingTrialBalanceof
Mr. Ravi, prepare Trading and

73

Profit and Loss Account for the

yearended31stMarch,2002anda
BalanceSheetasonthatdate.

TrialBalance

TrialBalance
Debit

Particulars

Rs.

Capital
Sales
Purchases
Salaries
Rent
Insurance
Drawings
Machinery
BankBalance
Cash
Stock(1.4.2001)
Debtors
Creditors

15,000
2,000
1,500
300
5,000
28,000
4,500
2,000
5,200
2,500
66,000

Adjustmentsrequired:
a) Stockon31.3.02
b) Salariesunpaid
c) Rentpaidinadvance
d) Insuranceprepaid

Rs. 4,900
Rs. 300
Rs. 200
Rs.
90

(Answer:G.P.Rs.9,700;N.P.
Rs.5,890;B/sRs.42,190)

32. From the following Trial Balance,

Prepare Trading, Profit and Loss
Account for the year ended
31.3.1981 and a Balance Sheet as
onthatdate.

DebitBalances
Purchases
Debtors
Returninwards
Bankdeposit
Rent
Salaries
Travellingexpenses
Cash
Stock(1.4.1980)
Discountallowed
Drawings

Rs.

CreditBalances

11,870 Capital
7,580 Baddebtsrecovered
450 Creditors
2,750 ReturnOutwards
360 BankOverdraft
850 Sales
300 Billspayable
210
2,450
40
600
27,460

Adjustments:
1) The closing stock on 31.3.81
wasRs.4,200.
2) WriteoffRs.80asbaddebts.
3) Create aprovisionforbad and
doubtfuldebtsat5%onSundry
debtors.
4) RentoutstandingRs.120.
(Answer:G.P.Rs.4,470;N.P
Rs.2,595;B/sRs.14,285)

33. The following are the balances

extractedfromthebooksofGanesh
as on 31.3.1999. Prepare Trading
andProfitandLossaccountforthe
year ending 31.3.1999 and a
BalanceSheetasonthatdate.
TrialBalanceason
31.3.1999

DebitBalances
Drawings
CashatBank

Rs.

CreditBalances

4,000 Capital
1,700 Sales

Rs.
20,000
16,000

74

75

CashinHand
Wages
Purchases
Stock(1.4.1998)
Buildings
SundryDebtors
Billsreceivable
Rent
Commission
Generalexpenses
Furniture

6,500 SundryCreditors
1,000
2,000
6,000
10,000
4,400
2,900
450
250
800
500
40,500

4,500

40,500

Thefollowingadjustmentsaretobemade:
1) Stockon31.3.99wasRs.4,000.
2) Interestoncapitalat6%tobeprovided.
3) InterestonDrawingsat5%tobeprovided.
4) WagesyettobepaidRs.100.
5) RentprepaidRs.50.
(Answer:G.P.Rs.10,900;N.P.Rs.8,450;B/sRs.30,050)

34. FromthefollowingTrialBalanceofThiru.Rehmanason31stMarch1995,prepareTradingand
ProfitandLossaccountandBalancesheettakingintoaccounttheadjustments.
TrialBalance
DebitBalances

Rs.

CreditBalances

LandandBuilding
Machinery
Patents
Stock(1.4.1994)
Sundrydebtors
Purchases

42,000
20,000
7,500
5,760
14,500
40,675

CashatBank
ReturnInwards
Wages
Fuel&Power
Carriageinwards
Carriageoutwards
Salaries
Generalexpenses

76
3,170
680
8,480
4,730
2,040
3,200
15,000
8,245

Insurance

Capital
Sales
Returnsoutwards
Sundrycreditors

600
1,76,580

Rs.
62,000
98,780
500
15,300

1,76,580

Adjustments:
1)

Stockon31.3.1995wasRs.6,800.

2)

SalaryoutstandingRs.1,500

3)

InsuranceprepaidRs.150.

4)

Depreciatemachinery@10%andpatents@20%.

5)

Createaprovisionof2%ondebtorsforbaddebts.

(Answer:G.P.Rs.43,715;N.P.Rs.11,530;B/sRs.90,330).

35. FromthefollowingTrialBalanceofTmt.Selvapriyaason31stMarch2005,prepareTradingand
ProfitandLossaccountandBalancesheettakingintoaccounttheadjustments.
TrialBalance
DebitBalances

Rs.

CreditBalances

Purchases
Salaries
Rent

2,00,000 Capital
10,000 Sales
7,500 Sundrycreditors

Insurancepremium
Drawings
Machinery
Cashatbank

1,500
50,000
1,40,000
22,500

Computers
Furniture
Cash
OpeningStock
Sundrydebtors

77
1,25,000
50,000
10,000
26,000
12,500
6,55,000

Rs.
3,00.000
2,50,000
1,05,000

6,55,000

Adjustments:
1. Closingstockason31.3.2005 Rs. 39,000
2. Rentoutstanding
3.

Rs. 1,000

Provideinterestoncapital@10%andonDrawings@8%.

(Answer:G.P.Rs.63,000;N.P.Rs.17,000;B/sRs.3,99,000)

78

Chapter - 2

ACCOUNTS FROM INCOMPLETE RECORDS

(Single Entry)

Learning Objectives

Afterstudyingthischapter,youwillbeableto:
1 understand the meaning, definition, features and
limitationsofsingleentrysystem.
2 seetherelationshipbetweendoubleentryandsingleentry.
3 estimatethecapitalbypreparingstatementofaffairs.
4 determinetheprofitorlossbypreparingthestatement
ofProfitorLoss.
5 preparethefinalaccounts.
SingleEntrySystemisanincomplete,inaccurate,unscientificand
unsystematic system of book keeping. The name of the system itself
showsthatthedoubleaspectsofbusinesstransactionsarenotrecorded.
ThissystemmakesuseofDoubleEntrySystempartially.Itmaintains
only personal and cash accounts. Real and nominal accounts are not
maintained.Itisasystem,adoptedbycertainbusinesshouseswhich,for
theirconvenienceandmorepracticalapproach,rejectthestrictrulesof
thedoubleentrysystemandmaintainonlythebareessential

records. In other
words, it is a
defective double
entry

system
manipulated to meet
the needs of small
tradingconcerns.
According to
KohlerSingleEntry
Systemisasystemof
bookkeeping in
whichasarule,only
records of cash and
personalaccountsare
maintained. It is
always incomplete
double entry varying
withcircumstances.
Thus,singleentry
actually refers to
incomplete double
entry system or the
defectivedoubleentry
system.Itisnotbased
on dual aspect
concept. Hence it is
incomplete, inaccurate
andunscientific.

2.1 Features
of
Single Entry:

79

1.

Suitable for sole

traders
and
partnership firms:

Thesingleentry

system is
suitableonlyfor
soletradersand
partnership
firms.
Companies
cannot keep
booksonsingle
entry system
becauseoflegal
provisions.
2. Only

personal

accounts
cash

and

accounts

are kept:

In this
systemitisvery
commontokeep
only personal
accounts and to
avoid real and
nominal
accounts. It also
keeps one cash
book which
mixes

up
business as well
as

private
transactions.

3. All transactions
are
not
recorded:
All

business
transactions are
not recorded in
the books of
account. Some
of them are
recorded in the
books

of
accounts,
certain
transactions are
noted in the
diary and some
of them are in
thememories.
4. Lack
uniformity:

of

This
system lacks
uniformity as it
is a mere
adjustment of
double entry
system,
accordingtothe
convenience of
theindividual.

5. Collection
of
information from
original

documents:

Itis
quite oftenseen
that

for
information one
has to depend
on original
vouchers. For
example to
know total
purchases and
sales,onehasto
depend on
copies

of
invoices.
80

6.

7.

Profit
only
an
estimate:
Profit

system

incomplete,

under this system

is only an
estimate.

becauserealand
nominal
accountsarenot
prepared and
also due to the
fact that the
debit and credit
aspect of all
transactions are
notrecorded.

True
financial
position can not
be ascertained:

Truefinancial
positioncannot
beascertained
asBalance
Sheetisnot
prepareddueto
theabsenceof
nominaland
realaccounts.
8. Not accepted by
Tax
Authoritiess:

Due

to
incompleteness,
inaccuracy, and
unsystematic
nature, it is not
accepted by tax
authorities.
2.2 Limitations of
Single Entry:
1.

Incomplete
unscientific
method:

and

This

is

2. Trial
Balance
can
not
be
prepared: Quite

often this
systemdoes not
record both the
aspects of
transactions,
therefore,atthe
end of the year
arithmetical
accuracy of the
bookscannotbe
checked by
preparingatrial
balance.
3. Performance
the

of

business

cannot
ascertained:

be

Trading,
profit
and loss account
cannot

be
prepared and
hence the gross
profit, net profit
and rate of net
profit on sales
cannotbeknown.
4. True
financial
position cannot
be ascertained:

It is very
difficult
to
prepare balance
sheet,sothetrue
financial
position cannot
beascertained.
5. Comparison with
previous years
performance is not
possible:

Due

to
incomplete
information and
nonavailability

7. Difficulty
obtaining

in
loan:

Accounts
prepared
accordingto this

ofpreviousyears
information,
comparison
between the
current and
previous years
performance
cannot be made.
Comparison is
required to
identifytheareas
of weakness and
rectification.
6. Unacceptable to
tax authorities:

Tax authorities
(incometaxand
salestax)donot
accept accounts
prepared
according to
single entry
system for
computation of
taxes.
81

system are not

accepted by
banks andother
money lending
institutions,soit

is very difficult
toobtainloan.
8. Difficult to locate

It is
difficulttolocate
frauds under this
system and so
employees may
becomedishonest
and negligent. It
encourages
misappropriation,
fraud

and
carelessness.
frauds:

9. Difficult

System
Single

the

price

the

of

business: Due to

the absenceoftrue
and reliable net
profitorassetsand
liabilities, it is
difficult

to
determine the
price of the
business at the
timeofitssale.

2.3 Differences
between
Double Entry

Entry

System:
BasisofDistinction

DoubleEntr

1. Principle

Foreverydebitth
correspondingcre
viceversa

2. Recordingof
transaction

Debitandcredita
alltransactionsare
recorded.

3. Natureof
accounts
maintained

Maintainscomple
ofpersonal,reala
nominalaccounts

4. TrialBalance

Arithmaticalaccu
therecordscanbe
bypreparingaTri
Balance

to

determine

and

5. Determinationof AProfitandLoss
profitorlossand andBalancesheet
financialposition convenientlyprep
sincethebookof
presentacomplete
6. Suitability

Itissuitableforal
traders.

7.Dependability

Itistheonlyscientific
systemofkeepingbooks
ofaccounts.

8.Acceptability

Recordsareacceptable
forthepurposeoftax,
loansetc.

9.Internalcheck

Internalcheckispossible

2.4 Distinction
between
Statement
Affairs

of
and

Balance
Sheet:
Statementof
affairswhichlooks
likeabalancesheet
differsfromthe
balancesheetinthe
followingrespects.

BasisofDistinction

BalanceSheet

StatementofAffairs

1.Objectives

ToKnowthefinancial
positionofthebusiness

Tofindoutthecapitalof
business

2.Accounting
method

Whenaccountingis
maintainedunderdouble
entrysystem,balance
sheetisprepared

Statementofaffairsis
preparedwhenaccounts
aremaintainedundersingle
entrysystemofaccounting

3.Basisof
preparation

Itispreparedexclu
sivelyonthebasisof
ledgeraccounts

Itispreparedonthebasis
ofsomeledgeraccounts
andestimates.

4.Reliability

Itisregardedasa
reliablestatement

Itisnotregardedasreliable.

5.MissingofFacts

Sinceboththeaspects
ofalltransactionsare
dulyrecorded,nochance
formissingoffacts.

Thereremainsalwaysa
possibilityformissingof
facts,becausetheaccounts
areincomplete.

82

83

method or
Capital
comparison
method

2.5 Methods of
ascertaining profit
or loss:
Whenaccountsare
keptundersingleentry
system,thefollowing
methodsareadoptedto
findoutprofitorlossof
thebusiness.

1.

Statement
of affairs
method or
Net worth

2.

Conversion
method

2.5.1 Statement
Affairs
Method:

of

Thefollowing
proceduresare
adoptedto
calculateprofit.
Step 1 Ascertain

opening

ent
of
affa
irs

capital: A

statement
of affairs
at the
beginning
oftheyear
isprepared
tofind out
theamount
of capital
in the
beginning.
A
statement
affairs is
like a
Balance
sheet. The
difference
between
assets and
liabilities
side
represents
Opening
Capital.
For
mat
of
stat
em

Liabilities
SundryCreditors
BillsPayable
OutstandingExpenses
BankOverdraft
Capital(Balancingfigure)

Rs.
xxxx
xxxx
xxxx
xxxx
xxxx

xxxx

Step

Ascertain
ment
Closing
Capital:
Prepare a
statement
of affairs
(after all
adjustmen
ts*) at the
endofthe
accountin
g period,
to
ascertain
closing
capital.

Step 3 Add the

amount of
drawings
(whether
in cash or
inkind) to
theclosing
capital.

Step4Deductthe
amountof
Additiona
lCapital
introduced
,fromthe
above,to
get
Adjusted
capital.
Step5
Ascertain
ment
profitor
lossby
deducting
opening
capital
fromthe
adjusted
closing
capital.

Adjusted closing capital = Closing

capital +
Drawings
Additional
capital
introduced
during the
year.

*Adjustments:
Depreciation,interest
oncapitals,interest
ondrawings,
ProvisionforBad
debtsetc.

capital=Loss

Illustration:1

Statementof
Profitor
Lossforthe
year______

Add:

ClosingCapital
Drawings

Less:

Additionalcapitalintroduced
Adjustedclosingcapital
Less:
Openingcapital
NetProfitorlossfortheyear
Note:Ifadjusted
closing
capitalis
morethan
opening
capital=
ProfitIf
adjusted
closing
capitalisless
thanopening

Findoutprofitor
lossfromthe
following
information.

Rs.
4,00,000
90,000
5,00,000
30,000

OpeningCapital
Drawings
ClosingCapital
AdditionalCapitalduringtheyear
84

Solution:

85

Sta
tem
ent
of
pro
fit
or
los
s

Add:
Less:
Less:
Illustration:
2
Calculate
the
missing
informatio

Closingcapital
Drawings

nfromthe
following.

Profitmadeduringtheyear
Capitalattheend
AdditionalCapitalintroduce
Drawings
Capitalinthebeginning
Solution:
Closingcapital(Balancing
Add:Drawings

AdditionalCapital
Adjustedclosingcapital
Openingcapital

Less:AdditionalCapital
Adjustedclosingcapital
Less:Openingcapital
Profitmadeduringtheyear

Profitfortheyear

Ans:CapitalattheendRs.

Note:
Step1 Add
Pr
ofi
t
of
Rs
.4,
80
0
wi
th
op
en
in
g
ca
pit
al
Rs
.9,
60
0
=
A
dj
ust
ed
cl
osi
ng
ca

pital
Rs.14,4
00.
Step 2 Add
Additio
nal
capital
of
Rs.4,00
0 with
Adjuste
d
closing
capital
Rs.14,4
00 =
Rs.18,4
00
Step 3 Deduct
drawin
gs
Rs.2,40
0 from
the
total
amount
arrived
(Step2)
Rs.
18,400
=

Cl
osi
ng
ca
pit
al
Rs
.1
6,
00
0.

Ascertain the
profitorlossmade
by Mr.Suresh for
the year ended
31stMarch2004.
Solution:
Calculation of
closing capital:

Illustration:
3

Statement
ofaffairsof
Mr.Suresh
ason
31.3.2004

Mr.Sures
h started
business with
Rs.2,00,000
on 1st April
2003. His
books are
kept under
single entry.
On 31st
March, 2004
his position
wsasunder:
Liabilities
SundryCreditors
BillsPayable
Outstandingcreditors

Rs.
40,000
5,000
7,500

Liabilities
Sundrycreditors
Billspayable
Outstandingcreditors

Rs.
Assets
40,000 Cashinhand
5,000 CashatBank
7,500 Furniture
86

Rs.
6,000
10,000
30,000

87

Stock
SundryDebtors
Closingcapital
(Balancingfigure)

2,48,500

Furniture
SundryCreditors

He introduced
an additional capital
Statementofprofitorlossfortheyearended31.3.2004
of Rs.8,000 during
thefinancialyear.He
withdrew Rs.14,000
Closingcapital
fordomesticpurpose.
Less:Openingcapital
Findouttheprofitfor
the year ended
Profitfortheyear
31.3.2004.
3,01,000

Illustration:4
Prakashkeeps
hisbooksbySingle
EntrySystem.His
positionon1.4.2003
and31.3.2004wasas
follows:

Cash
BankBalance

Solution:
i) Calculation of
opening capital:

Statementof
affairsof
Mr.Prakash
ason1.4.2003
Liabilities
Sundrycreditors

Rs.
6,000

OpeningCapital
(Balancingfigure)

47,500
53,500

ii) Calculation of
Closing Capital:

Statementof
affairsof
Mr.Prakashas
on31.3.2004

Liabilities
Sundrycreditors

Rs.
12,000

Closingcapital
(Balancingfigure)

65,000

Assets
Cash
BankBalance
Stock
SundryDebtors
Furniture

77,000

Rs.
6,000
15,000
10,000
40,000
6,000

77,000

StatementofProfitorLossfortheperiodended31.3.2004

Add:

Rs.
65,000
14,000
79,000
8,000
71,000
47,500
23,500

Closingcapital
Drawings

Less: Additionalcapital
Adjustedclosingcapital
Less: Openingcapital
Profitfortheyear20032004
Illustration:5
Mrs. Vanitha
keeps her books on
singly entry basis.
Findouttheprofitor
loss made for the
period

ending
31.3.2004.
Assets&Liabilities
BankBalance
Cashonhand
Stock

88

89

SundryDebtors
Plant
Furniture
SundryCreditors

Mrs.Vanitha had
withdrawn Rs.10,000
for her personal use
and had introduced
fresh capital of
Rs.4,000.Aprovision
of 5% on debtors is
necessary. Write off

depreciation on plant
at 10% and furniture
at15%.

ii) Calculation of
closing capital

Statementof
affairsof
Mrs.Vanitha
ason31.3.2004

Solution:
i) Calculation of
Opening Capital:

Liabilities

Statementof
affairsof
Mrs.Vanitha
ason1.4.2003
Liabilities
BankBalance(O/d)
SundryCreditors

Rs.

SundryCreditors

Rs.
18,000

Rs.
3,500
15,000

L
P
Closingcapital

24,520

(Balancingfigure)

Openingcapital
(Balancingfigure)

23,200
41,700

42,520

Statementof
Profitorlossfor
theperiodended
31.3.2004

Rs.

Add:

Closingcapital

24,520

Drawings

10,000
34,520

Less:

Additionalcapital

4,000

Less:

Adjustedclosingcapital

30,520

Openingcapital

23,200

Profitmadeduringtheyear
90

Illustration6:

7,320
91

CashatBank
Stock

RamandLaxman
areequalpartnersina

Billspayable

businessinwhichthe

Plant&Machinery
andfurnitureareto
bedepreciatedby
10%.

booksarekeptbysingle
entry.On1.4.2004their
positionwasasunder:

Liabilities

Rs.

Drawings:Ram
Laxman

Capitalaccounts:
Ram

2,50,000

Laxman 2,50,000

5,00,000

Billspayable

20,000

SundryCreditors

30,000

5,50,000

On31.3.2005theirpositionwasasunder:
Cashinhand
SundryCreditors
SundryDebtors
Billsreceivable

Ascertaintheprofit
fortheyearended
31.3.2005.

Solution:
Calculation of
closing capital:

Statementof
affairsofRam&
Laxmanason
31.3.2005
Liabilities

Rs.

Sundrycreditors
Billspayable

Closingcapital
(Combinedcapital
ofRam&Laxman)

Rs.
35,000 Cashinhand
10,000 Cashatbank
Sundrydebtors
Billsreceivable
Stock
4,70,500 Plant&Machinery
Furniture
Less:Depreciation
5,15,500

Statementof
profitorlossfor
theyearended
31.3.2005

Rs.
Combinedclosingcapital
Add:

Less:

Drawings:
Ram

30,000

Laxman

25,000

5,25,500

Combinedopeningcapital

5,00,000

Conversion
Method

(Conversio
n of single
entry

55,000

Adjustedclosingcapital
Profitfortheyear
2.5.2

4,70,500

into

double
entry
system)
If it is desired to
calculate profit by
preparing Trading and
ProfitandLossaccount
undersingleentrythen
it is called conversion
method. Following
steps are necessary to
prepare Trading and
ProfitandLossaccount

25,500
92

93

andBalanceSheetfrom
the

incomplete
information.

Step 1 Opening
Statem
ent of
Affairs
:
Prepare
stateme
nt of
affairs
in the
beginni
ng so
as to
calculat
e
capital
in the

beginni
ng.
Step 2

Other
Accoun
ts:
Then
prepare
(i)Total
debtors
account
, and
(ii)
Total
Creditor
s
account
,tofind
out
credit
sales,
credit
purchas
es,
creditor
s or
debtors
balance
eitherin
the
beginni
ngorat

theend.

Step3 Totalsales
and
total
purcha
se:
After
prepari
ng
these
account
s,
calculat
e
(1) To
tal
sal
es,
by
ad
di
ng
ca
sh
sal
es
an
d
cr
ed
it

sal
es,
an
d
(2) To
tal
pu
rc
ha
ses
by
ad
din
g
cas
h
pu
rch
ase
s
an
d
cre
dit
pu
rch
ase
s.
Step 4

Final
Accou
nt:

Now
prepare
Trading
, Profit
and
Loss
account
and
Balanc
eSheet.
Calculationof
MissingFigures:
The information
which is needed for
preparing the final
accounts is not
directly available
from the incomplete
records. Hence, we
needtofindoutsuch
missing figures by
preparing relevant
accounts.Letuslearn
how such missing
figures can be
extracted

from
incomplete records
by preparing the
relevant accounts.
The important ones
arediscussedbelow:

1.

2.

Calculation
of total
purchases
or creditors
in the
beginning
or at the
end of the
year.

Account is given
below:

ToCashpaid
ToDiscountReceived

By B
(O

Calculation
of total
sales or
debtors in
the
beginning
or at the
end of the
year.

ToPurchasesReturns
ToBalancec/d
(ClosingBalance)

(balan

(1)Ascertainment of
TotalPurchases:
Total purchases
are calculated by
adding cash and
credit purchases.
Cash purchases, are
given in Cash Book.
Credit purchases are
calculated

by
preparing

total
creditors account.
The specimen of
Total Creditors

TotalCredito

Dr.
Particulars

Amount
Rs.

Lookatthefollowing
illustration and see
how total purchases
havebeenfoundout.
Illustration 7: From
the

following
information, you are
required to calculate
totalpurchases:

Rs.
Cashpurchases
CreditorsasonApril1,2002
Cashpaidtocreditors
Purchasesreturn

17,000
8,000
31,000
1,000

CreditorsasonMarch31,2003
94

13,400
95

Solution:
TotalCreditorsAccount

Dr.
Particulars
ToCashpaid
ToPurchasesreturn
ToBalancec/d
(ClosingBalance)

Amount
Rs.
31,000
1,000
13,400

Cr.

Particulars

Amount
Rs.

ByBalanceb/d
(OpeningBalance)
ByCreditPurchases
(BalancingFigure)

8,000

37,400

45,400

TotalPurchases

45,400

=Cashpurchases+Creditpurchases
1= 17,000+37,400
2= Rs.54,400.

(2) AscertainmentofTotalSales:
Totalsalesarecalculatedbyaddingcashandcreditsales.
Cashsalesaregivenincashbook.Forascertainingtheamount
ofcreditsales,thetotaldebtorsaccountshouldbeprepared.The
specimenoftotaldebtorsaccountisgivenbelow:
TotalDebtorsAccount

Dr.
Particulars

Amount
Rs.

ToBalanceb/d(Op.Bal.)
ToCreditSales(Bal.Fig.)

Cr.

Particulars

By Cashreceived
By DiscountAllowed

Amount
Rs.

BySalesReturns
ByBalancec/d(Clo.Bal.)

Illustration8:

Fromthefollowingfactsyouarerequiredtocalculatetotal
salesmadeduringtheperiod:
Rs.
SundryDebtorsason
April1,2002
Cashreceivedfrom
SundryDebtors

Rs.
SundryDebtorsason
March31,2003
CashSales

20,400
60,800

SalesReturn

5,400

TotalDebtorsAccount

Dr.
Particulars

Amount
Rs.

Particulars

ToBalanceb/d(Op.Bal.)

20,400

ByCashreceived

ToCreditSales(Bal.Fig.)

73,400

BySalesReturn
ByBalancec/d(Clo.Bal.)

93,800

TotalSales

27,600
56,800

Cr.
Amount
Rs.
60,800
5,400
27,600
93,800

=CashSales+CreditSales
1= Rs.56,800+Rs.73,400
2= Rs.1,30,200

(3)

Ascertainmentofbalancesofsundrydebtorsandsundry
creditors:

Ifcreditsalesandcreditpurchasesaregiven,theopeningor
closingbalancesofdebtorsand/orcreditorscanbeascertained
bypreparingtotaldebtorsaccountandtotalcreditorsaccounts.
Illustration:9
Fromthefollowingparticulars,calculateclosingbalances
DebtorsandCreditors:
96

97

Rs.
28,680
41,810
1,51,400
1,65,900
5,200
4,800
7,440
6,444
1,50,536
1,43,765

SundryDebtorsason1.4.2001
SundryCreditorsason1.4.2001
Creditpurchases
Creditsales
Discountearned
Discountallowed
Returnoutwards
Returninwards
Cashreceivedfromdebtors
Cashpaidtocreditors
Solution:
TotalDebtorsAccount

Dr.
Particulars

Amount
Rs.

Particulars

ToBalanceb/d(1.4.2001)
ToCreditSales

28,680
1,65,900

ByReturninwards
ByCashreceived
ByDiscountallowed
ByBalancec/d
(Balancingfigures)

ToBalanceb/d

1,94,580
32,800

Particulars

Amount
Rs.

ToReturnoutwards
ToCashpaid
ToDiscountreceived
ToBalancec/d
(Balancingfigures)

7,440
1,43,765
5,200

Amount
Rs.
6,444
1,50,536
4,800
32,800
1,94,580

TotalCreditorsAccount

Dr.

Cr.

Particulars

Cr.
Amount
Rs.

ByBalanceb/d(1.4.2001)
41,810
ByCreditPurchases
1,51,400

36,805
1,93,210
ByBalanceb/d

1,93,210
36,805

Illustration:10
Fromthefollowingdetails,findoutCreditSalesfortheyear.

Rs.
OpeningbalanceofSundryDebtors
Cashreceivedduringtheyear

30,000
2,05,000

ClosingbalanceofSundrydebtors

48,000

Discountallowed

13,000

GoodsreturnedbyCustomers

14,000

Solution:
TotalDebtorsAccount

Dr.
Particulars
ToBalanceb/d
ToCreditsales

Rs.

Particulars

30,000 ByCashreceived
2,50,000 ByDiscountallowed

(Balancingfigure)
2,80,000

Cr.
Rs.
2,05,000
13,000

BySalesReturn

14,000

ByBalancec/d

48,000
2,80,000

Illustration:11
FromthefollowingdetailsfindoutCreditPurchases.
Rs.
OpeningbalanceofSundryCreditors
50,000
ClosingbalanceofSundryCreditors
60,000
Cashpaid
2,65,000
Discountreceived
15,000
Purchasereturns
15,000

98

99

Solution:
Dr.

TotalCreditorsAccount

Particulars
ToCashpaid

Rs.

Particulars

2,65,000 ByBalancec/d

ToDiscountreceived
ToPurchasereturn

15,000 ByCreditPurchases
15,000
(Balancingfigure)

ByBalancec/d

60,000
3,55,000

Cr.
Rs.
50,000
3,05,000

3,55,000

Illustration:12
Findouttotalpurchasesandtotalsalesfromthefollowing
detailsbymakingnecessaryaccounts:
Rs.
OpeningbalanceofSundrydebtors

50,000

OpeningbalanceofSundrycreditors

30,000

CashcollectedfromSundrydebtors
Discountreceived
CashPaidtoSundrycreditors

3,00,000
1,500
20,000

Discountallowed

5,000

Returninwards

6,000

Returnoutwards

8,000

ClosingbalanceofSundrydebtors

35,000

ClosingbalanceofSundrycreditors

25,000

CashPurchases

12,000

CashSales
Solution:

24,000

i) Calculation of Credit Sales

TotalDebtorsAccount

Dr.
Particulars

Rs.

ToBalanceb/d

Cr.

Particulars

Rs.

50,000 ByCashreceived
ByDiscountallowed

ToCreditSales
(Balancingfigure)

2,96,000 ByReturns
Inwards

3,00,000
5,000
6,000

ByBalancec/d

35,000

3,46,000

3,46,000

ii) Calculation of Credit Purchases

TotalCreditorsAccount

Dr.
Particulars

Rs.

ToDiscountreceived
ToCashpaid

30,000

=
=
=
=
=
=

25,000 ByCreditPurchases
(Balancingfigure)

24,500

54,500

54,500

Cashpurchases+CreditPurchases
Rs.12,000+Rs.24,500
Rs.36,500
Cashsales+Creditsales
Rs.24,000+Rs.2,96,000
Rs.3,20,000
100

Illustration:13

Rs.

8,000

ToBalancec/d

TotalSales

Particulars

1,500 ByBalanceb/d
20,000

ToReturnoutwards

TotalPurchases

Cr.

101

Mr.James
commenced business
on 1.4.2004 with a
CapitalofRs.75,000.
He immediately
bought furniture for
Rs.12,000. During
theyear,heborrowed
Rs.15,000 from his
wifeas loan.Hehas
withdrawn Rs.21,600
for his family
expenses. From the
following particulars
you are required to
prepare Trading and
Profit&LossA/cand
Balance Sheet as on
31.3.2005.

Provide10%depreciationon
Solution:
i) Calculation of Credit Sales

TotalDebtor

Dr.
Particulars
ToBalanceb/d
ToCreditsales
(Balancingfigure)

CashreceivedfromSundrydebtors
CashpaidtoSundrycreditors
CashSales
CashPurchases
Carriageinwards
DiscountallowedtoSundrydebtors
Salaries
OfficeExpenses
Advertisement
ClosingbalanceofSundrydebtors
ClosingbalanceofSundrycreditors
ClosingStock
Closingcashbalance

Rs.

2,00,000
2,00,000

ii) Calculation of Credit Purchases

TotalCreditorsAccount

Dr.
Particulars

Rs.

ToCashpaid

Cr.

Particulars

Rs.

1,75,000 ByBalanceb/d

ToBalancec/d

50,000 ByCreditPurchases
Credit
(BalancingFigure)
2,25,000

2,25,000

TradingandProfitandLossAccount
ofMr.Jamesfortheyearended31.3.2005

Dr

Particulars

Rs.

ToOpeningStock
ToPurchases:
Cash
Credit

Rs.

Particulars

Rs.

BySales
Cash

1,00,000

Credit

2,00,000

40,000
2,25,000

Cr
Rs.

3,00,000

ToCarriageinwards
ToGrossProfitc/d

2,65,000
4,500 ByClosingStock
65,500

ToDiscountallowed
ToSalaries
ToOfficeexpenses
ToAdvertisement

3,35,000
4,000 ByGrossProfitb/d
5,000
4,000
5,000

ToDepreciationonfurniture
ToNetProfit
(transferredtoCapitalA/c)

2,25,000

35,000
3,35,000
65,500

1,200
46,300
65,500
102

65,500
103

Businessexpenses
Freeholdpremises(31.3.
Furniture(31.3.2004)
Closingstock
ClosingSundrydebtors
ClosingSundrycreditors
Closingcashbalance

Balance
Sheetof
Mr.James
ason
31.3.2005
Liabilities
Capital

Rs.

Rs.

75,000

Add:NetProfit
Less:Drawings
Loanfromwife
SundryCreditors

46,300
1,21,300
21,600

99,700
15,000
50,000

Preparetrading
andprofit&loss
accountfortheyear
ended31.03.2004and
balancesheetason
thatdate.

1,64,700

Illustration:14
Mrs.Malathy
maintained her
account books on
single entry system.
On 1.4.2003 her
capital

was
Rs.2,50,000.
Additionalinformation:
Openingstock
CashreceivedfromSundrydebtors
Cashsales
CashpaidtoSundrycreditors
OpeningSundrydebtors
OpeningSundrycreditors

Solution:

i) Calculation of credit sales:

TotalDebtorsAccount

Dr

Particulars

Rs.

Cr

Particulars

Rs.

ToBalanceb/d

20,000 ByCashreceived

25,000

ToCreditSales

45,000 ByBalancec/d

40,000

65,000

65,000

(Balancingfigure)

ii) Calculation of credit purchases:

TotalCreditorsAccount

Dr

Particulars
ToCashpaid
ToBalancec/d

Rs.

Cr

Particulars

Rs.

30,000 ByBalanceb/d

91,500

1,00,000 ByCreditPurchases
(Balancingfigure)
1,30,000

Dr

38,500
1,30,000

TradingandProfit&LossAccountofMrs.Malathy
fortheyearended31.3.2004
Particulars

ToOpeningstock
ToPurchasesCredit
ToGrossProfitc/d
ToBusinessexpenses
ToNetprofit
(TransferredtocapitalA/c)

Rs.

Particular

Rs.

1,25,000 BySales:
38,500 Cash
1,00,000
1,11,500 Credit
45,000
ByClosingstock
2,75,000
60,400 ByGrossProfitb/d
51,100
1,11,500
104

Balance

Cr

1,45,000
1,30,000
2,75,000
1,11,500
1,11,500

105

Sheetof

Mrs.Malath
yason
31.3.2004
Liabilities

Rs.

Capitl
Add:Netprofit

2,50,000

51,100

3,01,100 C
Rs.

SundryCreditors

1,00,000 S

C
4,01,100

Illustration15:
From

the
following details,
prepare Trading and
Profit&Lossaccount
for the period ended
31.3.2004 and a
Balancesheetonthat
date.
Stock
SundryDebtors
Cash
Furniture
SundryCreditors
OtherDetails:
Drawings
Discountreceived
Discountallowed
Sundryexpenses

Ason
5
1,2
1

Cashpaidtocreditors

Cashreceivedfromdebtors
Salesreturn
Purchasereturn
Cashsales
Solution:
i) Calculation of
opening capital:

Statem
entof
affairs
ason
1.4.200
3

Liabilities
SundryCreditors

Openingcapital
(Balancingfigure)

Rs.

Assets

Rs.

75,000 Stock
SundryDebtors
Cash
1,17,500 Furniture

50,000
1,25,000
12,500
5,000

1,92,500

1,92,500

ii) Calculation of Credit Sales:

TotalDebtorsAccount
Dr

Cr

Particulars

Rs.

Particulars

Rs.

ToBalanceb/d

1,25,000 ByDiscountallowed

ToCreditsales

3,30,000 ByCashreceived

(Balancingfigure)

5,000
2,67,500

BySalesreturns

7,500

ByBalancec/d

1,75,000

4,55,000

4,55,000

106

107

ToBalancec/d

iii) Calculation of
Credit Purchases:

3,22,500

TotalCreditorsAccount

Dr

Particulars
ToDiscountreceived
ToCashpaid
ToPurchasesreturn

87,500

Rs.
7,500
2,25,000
2,500

TradingandProfitan
fortheyearend

Dr
Particulars
ToOpeningstock
ToPurchases

Rs.

Rs.

50,000 B
2,47,500

Less:Purchase
Returns
ToGrossProfitc/d

Bala
nce
Shee
tas
on
31.3.
2004

2,500
2,45,000
55,000

3,50,000
ToDiscount
allowed
ToSundry
Expenses
ToNetProfit
(Transferredto
CapitalA/c)

5,000
17,500
40,000

62,500

Liabilities
Capital
Add:NetProfit
Less:Drawings

Rs.

Rs.

1,17,500
40,000
1,57,500
20,000

F
S
C
C
1,37,500
87,500

SundryCreditors

2,25,000

Q
U
E
S
T
I
O
N
S

I.Objective Type:

year.
4.

A statement of
affairsresembles
a________.

5.

Statement of
affairs method is
also called as
________method.

Closing capital
canbefoundby
preparing a
statement affairs
at the ________
oftheyear.

6.

________
capital can be
found

by
preparing a
statement of
affairs at the
beginningofthe

In ________
system, only
personal and cash
accounts are
opened.

7.

Credit purchase
canbeascertained
as the balancing
figureinthe

a)Fillintheblanks:
1.

2.

3.

Incomplete
records are those
recordswhichare
notkeptunder
________
system.

108

8.

9.

The excess of
assets over
liabilities is
________.
The total assets
of a proprietor
are Rs.5,00,000.
His liabilities
Rs.3,50,000.
Then his capital

________.
109

inthebusinessis
________.

10. Afirmhasassets
worth Rs.60,000
and capital
Rs.45,000. Then
its liabilities is
________.
(Answer:1)Double
Entry;2)

Networth;
3)
Opening;
4)Balance
Sheet;5)
end;6)
Single
entry;7)
Total
creditors
A/c.;
8) Capital;
9) Rs.
1,50,00
0; 10)
Rs.15,0
00)

3)the difference
between the
grossassetson
twodates.
2.

Incomplete
records are
generally used
by
a)Smalltraders
b)Companyc)
Government

3.

Credit sales is
obtainedfrom
a)Bills
Receivable
account b)
Totaldebtors
account

2) Choose

the
CorrectAnswer:
1.

Under

the
networth method
the basis for
ascertaining the
profitis

1)the difference
between the
capital ontwo
dates.
2) the difference
between the
liabilities on
twodates.

c)Totalcreditors
account
4.

Single Entry
Systemis
a)aScientific
method b)an
IncompleteDouble
EntrySystem

3) None of the
above.
5.

The capital of a
business is

ascertained by
preparing
1)Trading
account b)
Statement of
profitorloss
c)Statementof
affairs
(
A
n
s
w
e
r
s
:

1
.
(
a
)
;

2
.
(
a
)
;

.
(
b
)
;

4
.

(
b
)
;

5
.
(
c
)
)

affairsmethod.

II.Other Questions:
1.

2.
3.

4.

5.

6.

7.

What is the
meaning for
incomplete
records?
Define Single
EntrySystem.
What are the
features of
SingleEntry?
What are the
limitations of
Single Entry
System?
What

is
networth
method?
What

is
conversion
method?
What

is
statement of
affairs?

8.

What are the

differences
between single
entry and Double
Entry?

9.

Mention the
procedure to
calculate profit
bystatementof

10.

Mention the
procedure to
calculate profit
by conversion
method.

III.Problems:
StatementofAffairs
method:
1.

What shall be
theprofitsofthe
concernif:
Openingcapital
Closingcapital
Drawings
AdditionalCapital

(Answer:Rs.

2.

Calculate the
missing
information:
Closingcapital
Drawings
AdditionalCapital
Profitmadeduringtheyea
(Answ
er:
Openi
ng
capita

l
Rs.19,

3.

200)
110

111

Drawings
Loss

Calculate the
missing
informationwhen
there is no
drawings:

(An
swe
r:
Op
eni
ng
Ca
pita
l
Rs.
1,5
9,3
00)

Capitalattheend
Capitalinthebeginning
Profitsmadeduringtheyear
(An
sw
er:
Ca
pit
al
intr
od
uce
d
Rs.
42,
00
0)

4.

Calculate the
missing
information:
Closingcapital
AdditionalCapital

5.

Mr.Rajesh
maintains his
books on single
entrysystem.He
gives you the
following
information.

Capitalason1.4.2003
Capitalason31.3.2004
Drawingsduringthefina
Capitalintroducedduringt
Youarerequired

tocalculateprofitor
lossmadeby
Mr.Rajeshduring
200304.

year 1996 from

the particulars
givenbelow:

(Answer:ProfitRs.
1,20,000)
6.

Capitalon1.4.1996

Calculate the
missing
information:
Capitalinthebeginning
Profitsmadeduringtheyear
Capitalintroducedduringtheyear
Capitalattheend
(Answer:
Drawings
Rs.6,000)

7.

Calculate the
missing
information:
Drawings
AdditionalCapital
OpeningCapital
Profitmadeduringtheyear
(Answer:Closing
capitalRs.85,000)

8.

Find out the

profit of the
business for the

Capitalintroducedduring
Capitalason31.3.1997
Drawings
(
A
n
s
w
e
r:
P
r
o
fi
t
R
s.
9,
0
0
0

O
ct
o
b
e
r

2
0
0
0
)

Capitalattheend
Capitalintroducedduringthe
Drawings
Capitalatthebeginning

9.Calculatethemissingfigure:

(Answer:
Rs.2,700
Oct.2001)

Profitmadeduringtheyear
112

113

10.Calculatethemissingfigure:
Rs.
Capitalatthebeginning
Profitsmadeduringtheyear
Capitalattheend
Drawings

15,000
8,000
20,000
?
(Answer:Rs.3,000March2002)

11. Mrs.Sheelakeepsherbooksbysingleentry.Shestarted
business on 1st April 2002 with Rs. 3,00,000. On 31st
March2003herpositionwasasunder:
Cashinhand

Rs.
8,000

SundryCreditors

50,000

CashatBank

20,000

Billspayable

10,000

Furniture

40,000

Outstandingexpenses

8,000

Plant

2,00,000

SundryDebtors

1,50,000

Stock

1,50,000

BillsReceivable

15,000

AscertaintheprofitorlossmadebyMrs.Sheeladuring200203.

(Answer:ProfitRs.2,15,000)
12. Mrs.Revathi started business with Rs.1,20,000 as capital on
1.4.2003.DuringtheyearshehaswithdrawnattherateofRs.1,000

permonth.SheintroducedRs.20,000asadditionalcapital.
Herpositionon31.3.2004wasasfollows:
Bankbalance
Stock
SundryDebtors
Furniture
Cashinhand
SundryCreditors
Expensesoutstanding

Rs.
8,000
80,000
50,000
2,500
2,000
25,000
1,000

Shekeepsherbooksundersingleentrysystem.Determineher
profitorlossfortheyear200304.
(Answer:LossRs.11,500)

13. Mr.Muralikeepshisbooksundersingleentrysystem.Assets
andliabilitieson31.3.2002and31.3.2003stoodasfollows:

SundryCreditors
Furniture
SundryDebtors
Stock
CashBalance

31.3.2002
Rs.
15,000
15,000
75,000
35,000
5,000

31.3.2003
Rs.
30,000
15,000
1,00,000
50,000
60,000

HeintroducedanadditionalcapitalofRs.15,000duringthe
year.HewithdrewRs.35,000fordomesticpurpose.Findoutthe
profitorlossfor200203.
(Answer:ProfitRs.1,00,000)
14. ThebalancesappearinBharanidharansbookswhichare

keptonsingleentrybasis:
114
115

1stApril,
2000
Rs.
Furniture
Stock
SundryDebtors
Cash
SundryCreditors
Billsreceivable
Loan(Dr)
Investment

2,000
5,000
6,000
10,000
2,000
1,000

31stMarch
2001
Rs.
2,000
6,000
4,000
20,000
3,500
500
1,000
4,000

His drawings during the year were Rs.2,000. Depreciate

furnitureby10%andprovideareserveforbadanddoubtful
debtsat5%onSundrydebtors.
Prepareastatementshowingprofitfortheyear.
(Answer:ProfitRs.13,600Mar.2002)

15. Vijayanmaintainsbooksonsingleentry.Hegivesyouthe
followinginformation:
1stApril,2001 31stMarch,2002
Rs.
Rs.
Cashinhand

4,000

6,000

CashatBank

2,000

4,000

Stockintrade

24,000

24,000

6,000

10,000

20,000

25,000

Furniture
Sundrydebtors

Sundrycreditors
10,000
14,000
HehastakenRs.4,000fromthebusinesstomeethis

personalexpenses.Depreciatefurnitureby10%p.a.
Prepareastatementshowingprofitorlossfortheyear.
(June2002)
(Answer:ProfitRs.12,000)

Hint: Depreciationiscalculatedforoneyearonopening
balanceandforthedifferenceRs.4,000forsixmonths.
16. A trader has not kept proper books of accounts. His
positionason31.3.2003and31.3.2004wasasfollows:
31.3.2003
Rs.

31.3.2004
Rs.

CashatBank

75,000

50,000

Cashinhand

5,000

10,000

Stock

5,00,000

3,25,000

SundryDebtors

2,00,000

4,00,000

50,000

50,000

Machinery

4,00,000

4,00,000

SundryCreditors

6,00,000

7,00,000

Furniture

During the year he introduced Rs.1,00,000 as additional

capitalandwithdrewRs.10,000permonthfordomesticpurpose.
Depreciatefurnitureandmachineryby10%peryear.Ascertain
profitorlossfortheyearended31.3.2004.
(Answer:LossRs.1,20,000)

17. Vani and Veni were partners sharing profits and losses
equally. The accounts are maintained on single entry
system.On31.3.2002theirpositionwasasfollows:
116

117

Liabilities
SundryCreditors
Loan
Capital:
Vani
Veni

Rs.
1,00,000
40,000
80,000
80,000
3,00,000

18.Fromthefollowing,findoutcr

OpeningSundrydebtors
CashreceivedfromSundryde
DiscountallowedtoSundryd
Salesreturn
ClosingSundrydebtors

Thepositionofthefirmon31.3.2003wasfollows:
SundryCreditors
Stock
Plant&Machinery
SundryDebtors
CashatBank
Depreciateplant
&Machineryby
10%p.a.
Drawings:Vani
Rs.10,000;Veni
Rs.6,000.
Findoutthe
profitorloss
madeduringthe
year200203.
(Answer:
Profit
Rs.1,18,000)

Conversionmethod:

(Answer:1,1

19. From

the
following
details, calculate
creditsalesmade
during the year
2004.
SundryDebtors(1.4.2004)

OpeningSundrydebtors
CreditSales

CashreceivedfromSundryde
Returnsinward

21.Fromthefollowingdetails,fin

SundryDebtors(31.3.2005)
CashreceivedfromSundrydebtors

OpeningSundrycreditors

Salesreturn

ClosingSundrycreditors

Discountallowed

CashpaidtoSundrycreditors
Discountreceived
Purchasedreturns

20.CalculateClosingSundrydebtors:

(Answer:Rs.
119

118

22. From

the
following
details, calculate
the Sundry
debtors at the
end.
SundryDebtors(1.1.2000)
Creditsales
CashreceivedfromSundryDebtors
SalesReturns
Discountallowed
Cashsales

(Answer:Clo.Drs.
Rs.20,300)

23.CalculatetheSundrydebtorsat

OpeningSundryDebtors
Totalsales
Cashsales
CashreceivedfromSundryD
ReturnsInward
(Answer:Clo.Drs.
Rs.97,000)

24.Fromthe
following,findout
Sundrycreditorsat
theend.
OpeningSundrycreditors
CashpaidtoSundrycreditors
Discountreceived
Returnoutwards
Creditpurchases
(Answer:
Clo.Crs.Rs.
24,400)

25. Find out total

purchases and
total sales from
the following
details

by
preparing
necessary
accounts:

OpeningSundrydebtors
OpeningSundrycreditors
CashreceivedfromSundryde
Discountreceived
CashpaidtoSundrycreditors
Discountallowed
Returnsoutward
Returnsinward
ClosingSundrydebtors
ClosingSundrycreditors
Cashsales
Cashpurchases
(Answer:Total
SalesRs.6,21,000;
TotalPurchasesRs.
63,000)

26. From

the
following
particulars
calculate closing
balance of
Sundry debtors
and Sundry

creditors.
Sundrydebtorsason1.4.2002
Sundrycreditorsason1.4.2002
Creditpurchases
Creditsales
Discountearned
Discountallowed
Purchasereturns
Salesreturns
120

27. Mr.Kannan
started business
with Rs.2,62,500
on 1.4.2003. He
bought furniture
forRs.42,000.He
borrowed
Rs.52,500 from
bank. He had
withdrawn for
personalexpenses
Rs.75,600. From
the details given
below prepare
Trading and
Profit and Loss
account and
BalanceSheeton
31.4.2004.

CashreceivedfromSundryde
CashpaidtoSundrycreditors
(Answe
r:Clo.
Drs.
Rs.37,5
00;
Clo.
Crs.
Rs.38,5
00)
121

Creditsales
Cashsales
Creditpurchases
Cashpurchases
Wages
Discountallowed
Salaries
Businessexpenses
Advertisement
ClosingSundrydebtors
ClosingSundrycreditors
Closingstock
Closingcashbalance
Depreciationtobe
providedonfurniture
@10%.
(A

information
available in her
records, prepare
Trading, Profit
andLossaccount
for the year
ending
31.3.2003 and a
BalanceSheetas
on that date,
depreciating
machinery at
10%perannum.

ns
we
r:
Ca
sh
rec
eip
ts
fro
m
Dr
s.
Rs.
4,3
4,0
00
;
Cash
payments
toCrs.
Rs.6,12,50
0;G.P.
Rs.2,29,25
0;
N.P.
Rs.1,72,5
50;B/s
Rs.5,86,9
50)

28. Mrs.Pramila
maintained her
account books
on single entry
system.Fromthe
following

Rs.1,90,000)

Cas
h
Boo
k
Receipts
ToBalanceb/d
To(Cash)Sales
ToSundryDebtors

Rs.
16,000
80,000
60,000

1,56,000

OtherInformation:

SundryDebtors
SundryCreditors
Stock
Machinery
Furniture
Additionalinformation:
Discountallowed
Discountreceived
CreditSales
Creditpurchases
(Answer:Clo.Drs.
Rs.24,000;Clo.Crs.
Rs.13,600;Op.
capital
Rs.1,11,200;G.P
Rs.1,00,600;N.P.
Rs.81,200;B/s

29. From

the
following
details, prepare
Trading and
Profit & Loss
account and
Balance Sheet
for the year
ended31.3.04.

Ason
1.4.2003
Rs.
SundryStock
SundryDebtors
122

50,000
1,25,000
123

Ason
31.3.2004
Rs.
25,000
1,75,000

Furniture
Cash
SundryCreditors

5,000
12,500
75,000

OtherDetails:
Discountreceived
Discountallowed
Sundryexpenses
CashpaidtoSundrycreditors
CashreceivedfromSundrydebtors
Drawings
SalesReturns
PurchaseReturns

5,000
20,000
87,500
7,500
5,000
15,000
2,25,000
2,67,500
20,000
7,500
2,500

Chargedepreciationonfurniture@5%.
(Ans:Op.capitalRs.1,17,500;Cr.Sales
Rs.3,30,000;Cr.PurchasesRs.2,47,500;G.P.Rs.
52,500;N.P.Rs.39,750;B/sRs.2,24,750)
30. Fromthefollowinginformation,prepareTradingandProfit
andLossaccountandaBalanceSheetason31.3.98.

Sundrycreditors
Furniture
Cash
Sundrydebtors
Stock

Ason1.4.1997
Rs.
37,500
2,500
6,250
62,500
25,000

OtherDetails:
Rs.
Drawings
10,000
Discountreceived
3,750
Discontallowed
2,500
CashreceivedfromSundrydebtors 1,35,000
Cashpaidtocreditors
1,12,500

Ason31.3.1998
Rs.
43,750
2,500
10,000
87,500
12,500

Salesreturns
Purchasereturns
Sundryexpensespaid
Chargedepreciationonfurniture

3,750
1,250
8,750
5%

(Ans:Op.CapitalRs.58,750;Cr.salesRs.1,66,250;
Cr.PurchaseRs.1,23,750;G.P.Rs.27,500;
N.P.Rs.19,875;B/sRs.1,12,375)

31. The books of Mr.Ravishankar revealed the following

informationon1.4.2000.
Liabilities

Rs.

Assets

Capital
Sundrycreditors

83,030
9,010

Goodwill
Furniture
Sundrydebtors
Cashatbank

92,040

Rs.
18,540
14,010
46,830
12,660
92,040

Otherinformation:
Rs.
CashreceivedfromSundrydebtors 2,12,460
Drawings
81,600
Salariespaid
18,300
Rentpaid
9,450
CashpaidtoSundrycreditors
90,360
Sundryexpensespaid
3,840
Closingstock(31.3.2001)
32,000
Sundrydebtors(31.3.2001)
56,700
Sundrycreditors(31.3.2001)
16,000
Cashatbank(31.3.2001)
21,570
PrepareTradingaccountandProfitandLossaccountanda
BalanceSheetason31.3.2001.
(Ans:Cr.salesRs.2,22,330;Cr.purchasesRs.97,350;G.P.
Rs.1,56,980;N.PRs.1,25,390;B/sRs.1,42,820)

124

125

n.

CH
AP
TE
R3

DEPRE
CIATIO
N
ACCOU
NTING
Learning
Objectives
Afterstudying
thisChapter,
youwillbeable
to:
1 understand
themeaning
and
definitionof
depreciatio

2 recognise
the reasons
and causes
for
providing
depreciatio
n.
3 identify
various
methods of
depreciatio
n.
4 determine
the profit
or loss at
the time of
sale of
asset.
5 prepare
asset
account
and
depreciatio
n account
under
straight
line and
written
down value
methods.

All assets whose

benefitisderivedfora
long period of time,
usuallymorethanone
year period are called
as Fixed Assets.
These assets decrease
invalueyearafteryear
duetowearandtearor
lapse of time. This
reduction in value of
FixedAssetsiscalled
Depreciation.
Generally, the
term depreciation is
used to denote
decreasein value,but
in accounting, this
termisusedtodenote
decrease in the book
valueofafixedasset.
Depreciation is the
permanent

and
continuousdecreasein
the book value of a
fixedassetduetouse,

effluxion of time,
obsolescence,
expiration of legal
rights or any other
cause.
For instance, a
factoryowner,ownsa
machinery worth
Rs.1,00,000, may
estimate the life of
themachineryasfive
years. This means
that the value of the
asset is reducing
everyyear.Hence,it
isnecessarytospread
the cost over five
years during which
the benefit of the
assetisderived.Thus
depreciation
Rs.20,000
(Rs.1,00,000 / 5
years)istobetreated
asanexpense,which
is debited to Profit
andLossaccount.
3.1 Definition:
In the words of
Spicer and Pegler,
Depreciation is the

measure of the
exhaustion of the
effective life of an
assetfromanycause
during a given
period.

capacity and at a
particular point of
time they render
themselves useless.
This reductioninthe
production capacity
orearningcapacityis
termed

as
depreciation.

Carterdefines
depreciationasthe
gradualand
permanentdecrease
inthevalueofan
assetfromany
cause.

3.2 Need for

Providing
Depreciation:
The need for
providing
depreciation in
accounting records
arisesduetoanyone
or more of the
followingreasons.

According to
ICMA(InstituteofCost
and Management
Accountants London)
Terminology
Depreciation is the
diminution in intrinsic
value of asset due to
use and / lapse of
time.

1. To ascertain
correct profit / loss

For proper
matchingofcostwith
revenues, it is
necessary to charge
depreciation against
revenue in each
accounting year, to
calculate the correct
netprofitornetloss.

The above
definitionsrevealthat
whenfixedassetsare
used in business to
generateincome,they
lose their production
capacity or earning
126

127

2. To present a true
and fair view of the
financial position

Iftheamountof
depreciation is not
provided on fixed
assetsinthebooksof
account,thevalueof
fixed assets will be
shown at a higher
value than its real
value in the balance
sheet.Assuchitwill
not reflect the true
and fair financial
position of the
business. Hence, to
presentatrueandfair
view of the financial
position of the
business, it is
necessary

that
depreciation must be
deducted from the
book value of the
assets in the balance
sheet.
3. To ascertain the
real cost of
production

For ascertaining

the real cost of

production, it is
necessary to provide
depreciation.
4. To comply with
legal requirements

As per Section
205(1) of the
CompaniesAct1956,
it is compulsory for
companiestoprovide
depreciationonfixed
assets before it
declaresdividend.
5. To replace assets

Depreciation is
provided to replace
the assets when it
becomesuseless.
3.3 Causes of
Depreciation
C
a
u
s
e
s
o
f

D
e
p
r
e
c
i
a
ti
o
n

Internal
External
1.Wearand
Tear
1.
Obsolescence
2.Disuse
2.Effluxionof
time

The causes of
depreciation may be
internal or external.
The internal causes
arisefromoperationof
anycausenaturaltoor
inherent in the asset
itself. External causes
arise from the
operation of forces
outside the business.
These are being
discussedbelow:
I. Internal Causes
1. Wear

and

Wear and tear is

animportantcause
of depreciation in
case of tangible
fixed asset. It is
due to use of the

3.Maintenance

asset.

3.Timefactor

2. Disuse:

4.Depletion

tear:

Whena
machine is kept
continuously
idle, itbecomes
potentially less
useful.

3. Maintenance:

The value of

machine
deteriorates
rapidly because
oflackofproper
maintenance.

forcesofnature,
like weather,
wind, rain, etc.,
the value of
suchassetsmay
decreaseevenif
theyarenotput
intoanyuse.

It
refers to the
physical
deterioration by
the exhaustion of
natural resources
eg., mines,
quarries,oilwells
etc.

4. Depletion:

3. Time

II. External Causes

1. Obsolescence:

The old asset

will become
obsolete
(useless) due to
new inventions,
improved
techniques and
technological
advancement.
2. Effluxion
time:

3.4 Terms
used
for
Depreciation:
1.

This
refers to loss in
the value of
intangibleassets
Amortization:

suchas
goodwill,
patentsand
preliminary
expenses.

of

When
assets are
exposed to

Factor:

Lease, copy
right, patents
areacquiredfor
a fixed period
oftime.Onthe
expiry of the
fixed period of
time, the assets
ceasetoexist.

128

129

2. Depletion:

Decrease in the
valueofmineral
wealth such as
coal, oil, iron
ore, etc. is
termed as
depletion. The
moreweextract
mineral wealth,
the more they
aredepleted.
3. Obsolescence:

When an asset
becomesuseless
due to new
inventions,
improved
techniques and
technological
advances, it is
termed as
obsolescence.
3.5 Factors
Determining
the Amount of
Depreciation
1. Original cost of
the
asset
It
implies the cost

incurredonits
acquisition,
installation,
commissioning
andfor
additionsor
improvements
thereofwhich
areofcapital
nature
2. Estimated life:

It
implies the
period over
which an asset
is expected to
beused.

3. Residual value

:
It implies the
value expected
toberealisedon
its sale on the
expiry of its
usefullife. This
is otherwise
knownas scrap
valueorturnin
value.

3.6 Methods
of
Calculating
Depreciation

1.Straight line
method or
fixed
instalment
method.
2. Written down
value method
or diminishing
balancemethod
3.Annuity
method.
4. Depreciation
Fundmethod.
5. Insurance
Policy
method.
6.Revaluation
method.
Letusdiscuss
thesemethodsin
detail.
3.6.1 Straight Line
Method

or

Fixed
Instalment
Method

or

Original Cost
Method

Under this
method, the same

amount

of
depreciation is
charged every year
throughoutthelifeof
theasset.Theamount
and rate of
depreciation is
calculatedasunder.

1)

Amount of
depreciation
Total
cost
Scrap
value
=

Est
im
ate
d
Lif
e
2)Rateof
depreciation
Amoun
tof
Deprec
iation
=

x100

O
ri
gi
na
l
C
os

t
Illustration:1
A company
purchased Machinery
for Rs.1,00,000. Its
installation costs
amountedtoRs.10,000.
Its estimated life is 5
years and the scrap
value is Rs.5,000.
Calculate the amount
andrateofdepreciation

Solution:
Totalcost

= PurchasePrice+InstallationCharges
= Rs.1,00,000+Rs.10,000
= Rs.1,10,000
TotalcostScrapvalue

Amountofdepreciation =

Estimatedlife
Rs.1,10,000Rs.5,000

5
Rs.1,05,000

= =Rs.21,000

Rateofdepreciation

Amountofdepreciation
x100
Originalcost

130

Rs.21,0
00

Note:Understraight
linemethod,foreach
ofthefiveyears,the
amountof
depreciationtobe
chargedwillbe
Rs.21,000.

131

Merits:

1. Simplicity: It is
verysimpleand
easy

to
understand.

2.

Easy to calculate:

It is easy to
calculate the
amount and rate
of
depreciation.
3. Assets can be
completely
written
off:

Under this
method, the
book value of
the

asset
becomeszeroor
equal to its
scrap value at
theexpiryofits
usefullife.
Demerits:

The amount of
depreciation is same
in all the years,
although

the
usefulness of the
machine to the
business is more in
the initial years than
inthelateryears.
3.6.2. Written Down
Value Method
or
Diminishing
Balance
Method

or

Reducing
Balance
Method
Under

this
method,depreciationis

charged at a fixed
percentageeachyearon
the reducing balance
(i.e., cost less
depreciation) of asset.
The amount of
depreciation goes on
decreasing every year.
For example, if the
asset is purchased for
Rs.1,00,000

and
depreciation is to be
chargedat10%p.a.on
reducing balance
method,then

Depreciationforthe1styear = 10%

Depreciationforthe2ndyear = 10
(R

= Rs

Depreciationforthe3rdyear= 10%onRs.81,000
IIndYear
(Rs.90,000Rs.9,000)
IIIrdYear,etc.
= Rs.8,100andsoon.
Merits:

2. Recognised by
the Income Tax
authorities: This

1. Uniform effect on
the Profit and Loss
account of different
years:

The total charge

(i.e., depreciation
plus repairs and
renewals) remains
almost uniform
year after year,
since in earlier
years the amount
of depreciation is
more and the
amount of repairs
and renewals is
less, whereas in
later years the
amount

of
depreciationisless
andtheamountof
repairs

and
renewalsismore.

Depreciationamount
IstYear

methodis
recognisedby
theIncomeTax
authorities

3. Logical Method:

Itisalogical
methodasthe
depreciationis
calculatedon
thediminished
balanceevery
year.

Demerits:

Itisvery
difficulttodetermine
theratebywhichthe
valueofassetcould
bewrittendownto
zero.
3.6.3 Annuity
Method:

Repairs&
renewalsamount

Theannuity
methodconsidersthat

thebusinessbesides
loosingtheoriginalcost
oftheassetintermsof

depreciationandalso
looses
132

interest on the
amount used for
buyingtheasset.This
is based on the
assumption that the
amount invested in
theassetwouldhave
earned in case the
same amount would
havebeeninvestedin
some other form of
investment. The
annual amount of
depreciation

is
determined with the
helpofannuitytable.
This method is used
to

calculate
depreciation amount
onlease.
3.6.4 Depreciation
Fund Method or
Sinking Fund
Method :
Under

this
method,fundsaremade

133

available for the

replacementofassetat
the end of its useful
life. The depreciation
remains the same year
after year and is
charged to Profit and
Loss account every
year through the
creationofdepreciation
fund. The amount of
annual depreciation is
invested in good
securities bearing
interest at a specified
rate. The aggregate
amount of interest and
annual provision is
invested every year.
When the asset is
completely written off
oristobereplaced,the
securities are sold and
the amount so realised
by selling securities is
usedtoreplacetheold
asset.
3.6.5 Insurance

Policy Method:

Accordingtothis
method, an Insurance
policyistakenforthe
amountoftheassetto
be replaced. The
amountofthepolicyis
such that it is
sufficient to replace
the asset when it is
wornout.Asumequal
to the amount of
depreciationispaidas
premium every year.
The amount goes on
accumulating at a
certainrateofinterest
and is received on
maturity. The amount
soreceivedisusedfor
the purchase of new
asset,replacingtheold
one.
3.6.6 Revaluation
Method:

Under this
method, the assets
like loose tools are
revaluedattheendof
theaccountingperiod

and the same is

compared with the
value of the asset at
the beginning of the
year. The difference
is considered as
depreciation.

3.7 Recording
Depreciation
Depreciation is
directly charged
against the asset by
debitingDepreciation
accountandcrediting
the Asset account.
Depreciation account
is closed by
transferring to Profit
and Loss account at
the end of the year.
Theentrieswillbeas
under:
1)

For the amount

of depreciation
tobeprovidedat
the end of the
year:
DepreciationA/c..
ToAssetA/c.

2)

For transferring
the amount of
depreciationatthe
endoftheyear.

Profitand
LossA/c..
Dr.
withthe

amount

To
Deprecia
tionA/c.
of
depreciati
on

transferred
Asset Account
willbeshownatcost
lessdepreciationi.e.,
writtendownvalueat
theendoftheyearin
theBalancesheet.
Illustration:2
Raheem & Co.
purchased a fixed
asseton1.4.2000for
Rs.2,50,000.
Depreciationistobe
provided @10%
annuallyaccordingto
the Straight line
method. The books
are closed on 31st
Marcheveryyear.
Pass

the
necessary journal
entries,prepareFixed
asset Account and
DepreciationAccount
for the first three

years.

Solution:

10
AmountofDepreciation= 2,50,000x
100
= Rs.25,000
134

In the
Book
s of
Rahe
em &
Co.
Jo
ur
nal
En
tri
es
Date
2000
Apr1

Particulars
FixedassetA/c
ToBankA/c
(Fixedassetpurchased)

2001
Mar31 DepreciationA/c
ToFixedassetA/c
(Depreciationprovided)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&LossA/c)

135
2002
Mar31 DepreciationA/c
ToFixedassetA/c
(Depreciationprovided)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&Lossaccount)

2003
Mar31 DepreciationA/c
ToFixedassetA/c
(Depreciationprovided)

Profits&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&LossA/c)

L
e
d
g
e
r
A
c
c
o
u
n
t
s
F
i
x
e
d

A
s
s
e
t

A
c
c
o
u
n
t

Dr.
Date

Particulars

2000
Apr1

ToBankA/c

2001
Apr1

2002
Apr1

2003
Apr1

Rs.

20
2,50,000 M
2,50,000

ToBalanceb/d

20
2,25,000 M
2,25,000

ToBalanceb/d

20
2,00,000 M
2,00,000

ToBalanceb/d

D
e
p
r
e
c
i
a
t
i
o
n

A
c
c
o
u

1,75,000

n
t

Dr.

Cr.

Date

Particulars

2001
Mar31 ToFixedAssetA/c

2002
Mar31 ToFixedAssetA/c

2003
Mar31 ToFixedAssetA/c

Rs. Date

Particulars

Rs.

2001
25,000 Mar31 ByProfit&LossA/c

25,000

25,000

25,000

2002
25,000 Mar31 ByProfit&LossA/c

25,000

25,000

25,000

2003
25,000 Mar31 ByProfit&LossA/c

25,000

25,000

25,000

136

137

Illustration:3
A Company
purchased Machinery
for Rs.50,000 on 1st
April 2002. It is
depreciated at 10%
perannumonWritten
Down Value method.
The accounting year
endson31st Marchof
everyyear.
Passnecessary
Journalentries,
prepare
Machinery
accountand

Depreciationaccount
forthreeyears.
Solution:

Jo
ur
nal
En
tri
es
Date
2002
Apr1

Particulars
MachineryA/c
ToBankA/c
(Machinerypurchased)

2003
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

2004

Profit&LossA/c
ToDepreciationA/c
(Depreciationprovided)

Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&Lossaccount)
2005
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

138

Profit&LossA/c
Dr
ToDepreciationA/c
(Depreciationtransferred
toProfitandLossAccount)

L
e
d
g
e
r
A
c
c
o
u
n
t
s
M
a
c
h
i
n
e
r
y

A
c
c
o
u

n
t

u
n
t

Dr.
Date

Particulars

Rs.

2002
Apr1 ToBankA/c

50,000
50,000

2003
Apr1 ToBalanceb/d

45,000
45,000

2004
Apr1 ToBalanceb/d

40,500
40,500

2005
Apr1 ToBalanceb/d

36,450

D
e
p
r
e
c
i
a
t
i
o
n

A
c
c
o

Dr.

Cr.

Date

Particulars

2003
Mar31 ToMachineryA/c
2004
Mar31 ToMachineryA/c
2005
Mar31 ToMachineryA/c

Rs. Date

2003
5,000 Mar31 ByProfit&LossA/c
5,000
2004
4,500 Mar31 ByProfit&LossA/c
4,500
2005
4,050 Mar31 ByProfit&LossA/c
4,050

Some times, a
businessmaydisposean
asset when it is worn
out. In that case, it is
advisable to find the
profitorlossonsaleof
asset. This is done by
comparing the selling
price with the book
valueoftheasset.

Bookvalue=
C
o
s
t
P

Rs.
5,000
5,000
4,500
4,500
4,050
4,050

139

3.8 Calculation of
Profit or Loss on
sale of asset:

Particulars

r
i
c
e

l
e
s
s

T
o
t
a
l
D
e
p
r
e
c
i

a
t
i
o
n

p
r
o
v
i
d
e
d

t
i
l
l
t
h
e

d
a
t
e

o
f

s
a
l

e
Ifthebookvalue
islessthantheselling
price,thenitisProfit
onSale.
Ifthebookvalueis
morethanthe
sellingprice,itis
LossonSale.

Illustration:4
Ram
manufacturing
company purchased
on 1st April 2002,
Machinery

for
Rs.1,00,000. After
having used it for
three years it was
sold for Rs. 85,000.
Depreciationistobe
provided every year
attherateof10%per
annum on the fixed
instalment method.
Books are closed on
31st March every
year. Find out the
profitorlossonsale
ofmachinery.
Calculation of
Profit or Loss
on Sale of

Machinery

CostPrice
Less: Depreciationfor200203

Bookvalueonthe
dateofsaleisRs.
70,000
Asbookvalueisless
thansellingpricethe
differenceisProfit.

Less: Depreciationfor200304
Less: Depreciationfor200405
Bookvalueonthedateofsale
SellingpriceisRs.85,000.

1=
85,000
70,000
2@

Profit on sale of
machinery=Rs.15,000.

Illustration:5
Robert & Co.
purchased a Machinery
on 1st April 2002 for
Rs.75,000. After having
useditforthreeyearsit
was sold for Rs.35,000.
Depreciation is to be
provided every year at
the rate of 10% per
annum on Diminishing
balance

method.
Accounts are closed on
31st March every year.
Find out the profit or
loss on sale of
machinery.
Calculation of
Profit or Loss
on sale of

Machinery

Bookvalueonthe
dateofsale=
Rs.54,675.

CostPrice
Less: Depreciationfor200203
Less: Depreciationfor200304

Asbookvalueis
greaterthanselling
pricethedifferenceis
loss.
1=
54,675
35,000

Less: Depreciationfor200405
Bookvalueonthedateofsale
Sellingprice=Rs.
35,000.
140

3.9 Entries for

sale of asset:
Whenthe
followingentries
aremade:
1.Entryforsale
BankA/c.
Dr.
With

theamountofsale

ToAsset
A/c.
proceeds

2.Entryfor
depreciationprovided
duringtheyearof

2@
Loss on sale
of Machinery =
Rs.19,675.
sale.

141

DepreciationA/c.
ToAssetA/c.
Note:Depreciation
iscalculatedonthe
dateofsalewhich
maybeduringthe
yearorendofthe
year.
3.Entryforthe
transferofprofiton
saleofasset.
AssetA/c.
Dr.
ToProfit&LossA/c.

made

4.EntryforthetransferofLossonsaleofasset
Profit&LossA/c.
ToAssetA/c.

Dr.

a) Format of Fixed
Asset Account
when it is profit on
sales
F
i
x
e
d

A
s
s
e
t

A
c
c
o
u
n
t
Dr.
Date

Particulars

Rs.

Dateon

ToBalanceb/d

xxx

which
Saleis

ToProfit&LossA/c xxx
(ProfitonSales)

m
xxx

b) Format of Fixed
Asset Account
when it is loss on
sales

Note:Theabove
formatrelatesonlyto
theyearinwhichsales
are

made.

F
i
x
e
d

A
s
s
e
t

A
c
c
o
u
n
t

Illustration:6
Deepak
Manufacturing
Company purchased
on 1st April 2002,
Machinery

for
Rs.2,90,000andspent
Rs.10,000 on its
installation. After
having used it for
three years it was
sold for Rs.2,00,000.
Depreciationistobe
provided every year
attherateof15%per
annum on the Fixed
Instalmentmethod.

Dr.
Date
Year
Begin
ning

Particulars

Rs.

ToBalanceb/d

xxx

xxx

Pass

the
necessary journal
entries,

prepare
machinery account
and depreciation
accountforthreeyears
ends on 31st March
every
year.

Solution:
Calculation
of profit or
loss on sale
of machinery

Rs.
CostPrice(2,90,000+10,000)
Less:

Depreciationfor200203@15%

3,00,000
45,000
2,55,000

142
143

Less:

Depreciationfor200304@15%

45,000
2,10,000

Less:

Depreciationfor200405@15%

45,000

Bookvalueasonthedateofsale

1,65,000

AsbookvalueislessthansellingpricethedifferenceisProfit.
1=
2@

Rs.2,00,0001,65,000

ProfitisRs.35,000.
JournalEntriesinthebooksof
DeepakManufacturingCompany

Date
2002
Apr1

Particulars
MachineryA/c
ToBankA/c
(MachineryPurchasedand
installationchargespaid)

L.F.
Dr

2003
Mar31 DepreciationA/c
Dr
ToMachineryA/c
(DepreciationProvided)

Profit&LossA/c
Dr
ToDepreciationA/c
(DepreciationtransferredtoProfit
&Lossaccount)
2004
Mar31 DepreciationA/c
Dr
ToMachineryA/c
(Depreciationprovided)

Profit&LossA/c
Dr
ToDepreciationA/c
(DepreciationtransferredtoProfit
andLossaccount)

Debit
Rs.
3,00,000

45,000

45,000

45,000

45,000

Credit
Rs.
3,00,000

45,000

45,000

45,000

45,000

2005
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

Dr

Profit&LossA/c
Dr
TodepreciationA/c
(DepreciationtransferredtoProfit
&Lossaccount)

Mar31 BankA/c
ToMachineryA/c
(MachinerySold)

45,000

45,000

Dr

2,00,000

MachineryA/c
Dr
ToProfit&LossA/c
(Profitonsaleofmachinery)

35,000

45,000

45,000

2,00,000

35,000

Ledger Account
MachineryAccount

Dr.
Date
2002
Apr1

Particulars
ToBankA/c

Rs.

Date

Cr.
Particulars

2003
3,00,000 Mar31 ByDepreciationA/c

ByBalancec/d

3,00,000
2003
Apr1

ToBalanceb/d

ToBalanceb/d

Mar31 ToProfit&Loss
A/c
(Profitonsale)

45,000
2,55,000
3,00,000

2004
2,55,000 Mar31 ByDepreciationA/c 45,000

ByBalancec/d
2,10,000
2,55,000

2004
Apr1

Rs.

2,55,000

2005
2,10,000 Mar31 ByDepreciationA/c
35,000

ByBankA/c

2,45,000
144

45,000
2,00,000

2,45,000
145

Illustration:7

D
e
p
r
e
c
i
a
t
i
o
n

A
c
c
o
u
n
t

Machinery
account showed a
balance of Rs.80,000
on 1st April 2001. On
1st October 2003,
anothermachinerywas
purchased

for
Rs.48,000. On 30th
September 2003, a
machinery which has
book value Rs.80,000
on 1.4.2001 was sold
for the Rs.48,000.
Depreciation is to be
provided at 10% per
annum on Written
Down Value Method.
The accounting year
endson31stMarch.

Dr.
Date

Particulars

2003
Mar31 ToMachineryA/c

Rs.
45,000
45,000

2004
Mar31 ToMachineryA/c

45,000
45,000

2005
Mar31 ToMachineryA/c

45,000
45,000

Prepare
Machinery account
and Depreciation
account for three
years.
Solution:
Calculation of
Profit or Loss
on Sale of
Machinery

CostofMachinery(1.4.200
Less:Depreciationfor200102

Less: Depreciationfor200203
Less: Depreciationtillthedateofsale(30.9.2003)
Bookvalueonthedateofsale
Asbookvalueis
greaterthanselling
pricethedifferenceis
loss.
1= 61,560
48,000
@ Loss=Rs.13,560
L
e
d
g
e
r
A
c
c
o
u
n
t
s
M
a
c
h
i

n
e
r
y

A
c
c
o
u
n
t

Dr.
Date

Particulars

2001
Apr1

ToBalanceb/d

2002
Apr1

ToBalanceb/d

2003
Apr1
Oct1

ToBalanceb/d
ToBankA/c

2004
Apr1

ToBalanceb/d

Rs. Date

Particulars

Cr.
Rs.

2002
80,000 Mar31 ByDepreciationA/c
8,000

ByBalancec/d
72,000
80,000
80,000
2003
72,000 Mar31 ByDepreciationA/c
7,200

ByBalancec/d
64,800
72,000
72,000
2003
64,800 Sep30 ByDepreciationA/c
3,240
48,000
(for6months)

ByBankA/c
48,000

ByProfit&LossA/c
(Lossonsale)
13,560
2004
Mar31 ByDepreciationA/c
2,400
(onnewmachine
for6months)

ByBalancec/d
45,600
1,12,800
1,12,800
45,600
146

D
e
p
r
e
c
i
a
t
i
o
n

147

A
c
c
o
u
n
t

Dr.
Date
2002

Particulars

Rs. D

20

Mar31 ToMachineryA/c
2003
Mar31 ToMachineryA/c

8,000
8,000
7,200
7,200

2003
Sep30 ToMachineryA/c

3,240

2004
Mar31 ToMachineryA/c

2,400
5,640

Illustration:8
Vimal

&
Brothers purchased a
Machinery

for
Rs.3,75,000 on 1st
July 2002. It is
depreciated at 20%
per annum on
StraightLineMethod
for three years.
Having became
obsolete it was sold
for Rs.75,000 on
31.3.2005.
Pass the journal
entries,

prepare
Machinery account
and Depreciation
account. Accounts are
closed 31st March
everyyear.

Solution:
Calculation
of Profit or
loss on sale
of Machinery

CostofMachinery(1.7.200

Less:Depreciationfor200203
(for9monthsattherateof

Less: Depreciationfor200304
Less: Depreciationfor200405
Bookvalueonthedateofsale
Asbookvalueis
greaterthanselling
pricethedifferenceis
loss.
1=
Rs.
1,68,750
75,000
2@
Loss = Rs.
93,750
In the
Books
of
Vimal
&
Brothe
rs
Jo
ur
na
l
En
tri
es

Date

Particulars

2002
July31 MachineryA/c
ToBankA/c
(Machinerypurchased)
2002
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&Lossaccount)

2004
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&Lossaccount)

L.F.

Debit
Rs.

Dr

3,75,000

Dr

56,250

Dr

56,250

Dr

75,000

Dr

75,000

148

149

Credit
Rs.
3,75,000

56,250

56,250

75,000

75,000

2005
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

Dr

75,000

Profit&LossA/c
ToDepreciation
(Depreciationtransferred
toProfit&Lossaccount)

Dr

75,000

BankA/c
ToMachineryA/c
(Machinerysold)

Dr

75,000

Dr

93,750

Mar31 Profit&LossA/c
ToMachineryA/c
(Lossonsaleofplant)

75,000
75,000

75,000

93,750

Ledger Accounts

PlantAccount
Dr
Date
2002
July1

Cr
Particulars
ToBankA/c

Rs. Date

Particulars

2003
3,75,000 Mar31 ByDepreciationA/c

ByBalancec/d

3,75,000
2003
Apr1

ToBalanceb/d

2004
3,18,750 Mar31 ByDepreciationA/c
ByBalancec/d

3,18,750
ToBalanceb/d

56,250
3,18,750
3,75,000

2004
Apr1

Rs.

75,000
2,43,750
3,18,750

2005
2,43,750 Mar31 ByDepreciationA/c

75,000

ByBankA/c

75,000

ByProfit&LossA/c
(Lossonsale)

93,750

2,43,750

DepreciationAccount

2,43,750

Dr

Cr

Date

Particulars

2003
Mar31 ToMachineryA/c

Rs. Date

Particulars

Rs.

2003
56,250 Mar31 ByProfit&LossA/c
56,250

2004

56,250
56,250

2004

Mar31 ToMachineryA/c
2005
Mar31 ToMachineryA/c

75,000 Mar31 ByProfit&LossA/c

75,000
2005
75,000 Mar31 ByProfit&LossA/c

75,000
75,000

75,000

75,000

75,000

Illustration:9
OnApril1,2001MachinerywaspurchasedforRs.4,00,000.
On 1st October 2002, a new machine costing Rs.2,40,000 was
purchased.On30th September2003,themachinerypurchasedon
1st April2001havingbecameobsoletewassoldforRs.2,40,000.
Theaccountingyearendson31stMarchanddepreciationistobe
providedat10%p.a.onstraightlinemethod.

Passjournalentriesandprepareimportantledgeraccounts
forthreeyears.
Solution:
Calculation of Profit or Loss on Sale of Machinery

Rs.
CostofMachinery(April,2001)

4,00,000

Less:Depreciationfor200102

40,000
3,60,000

150

151

Less: Depreciationfor200203

Less: Depreciationtillthedateofsale(30.9.2003)
Bookvalueonthedateofsale
Asbookvalueis
greaterthanselling
pricethedifferenceis
loss.
1= Rs.3,00,00
0

2,40,000
2@

2001
Apr1

Particulars
MachineryA/c
ToBankA/c
(Machinerypurchased)

2002
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided)

MachineryA/c
ToBankA/c
(Newmachinepurchased)

2003
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided
40,000+12,000)

Loss=Rs.60,000.

Jo
ur
na
l
E
nt
ri
es
Date

2002
Oct1

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&LossA/c)

Profit&LossA/c
ToDepreciationA/c
(Depreciationtransferred
toProfit&LossA/c)

152
D

2003
Sep30 DepreciationA/c
D
ToMachineryA/c
(Depreciationprovidedon
firstmachinetillthedateofsale

BankA/c
ToMachineryA/c
(Firstmachinerysold)

Sep30 Profit&LossA/c
D
ToMachineryA/c
(LossonSaleofMachinery)
2004
Mar31 DepreciationA/c
ToMachineryA/c
(Depreciationprovided
onSecondMachine)

Profit&LossA/c
D
ToDepreciationA/c
(Depreciationtransferredto
profit&lossA/c)20,000+24,00

L
e
d
g
e
r
A
c
c
o
u
n
t
s

M
a
c
h
i
n
e
r
y

A
c
c
o
u
n

Dr.
Date
2001
Apr1

2002
Apr1
Oct1

Cr.
Particulars

Rs. Date

ToBankA/c

Particulars

Rs.

2002
4,00,000 Mar31 ByDepreciationA/c

ByBalancec/d

40,000
3,60,000

4,00,000

4,00,000

2003
3,60,000 Mar31 ByDepreciationA/c
2,40,000
(40,000+12,000)

ToBalanceb/d
ToBankA/c

52,000

153

o
n

A
c
c
o
u
n
t

6,00,000
2003
Apr1

ToBalanceb/d

5,48,000

5,48,000
2004
Apr1

ToBalanceb/d

2,04,000

D
e
p
r
e
c
i
a
t
i

Dr.
Date

Particulars

Rs.

2002
Mar31

20
ToMachineryA/c

40,000 M
40,000

2003
Mar31

20
ToMachineryA/c

52,000 M
52,000

2003
Sep30

20
ToMachineryA/c

20,000 M

Illustration:10

2004
Mar31 ToMachineryA/c

24,000
44,000

Aravinth

&
Brothers purchased a
MachineryforRs.90,000
on1st April2001.They
spent Rs.10,000 for
installation charges. But
the machinery was
broughtintousefrom1st
October 2001. It further
purchased a machinery
costingRs.20,000on1st
January 2004. Accounts
are closed 31st March
everyyear.Depreciation
is to be provided at the
rate of 10% per annum
onWrittenDownValue
Method.

Prepare
Machinery
account&
Depreciation
accountforthree

years.
In the
Books
of
Aravinth
&
Brother
s

L
e
d
g
e
r
A
c
c
o
u
n
t
s
M
a
c
h
i
n
e
r
y

A
c
c
o
u
n
t

Dr.

Cr.

Date
2001
Apr1

ToBankA/c

2002
Apr1

ToBalanceb/d

2003
Apr1
2004
Jan1

2004
Apr1

Particulars

ToBalanceb/d
ToBankA/c

Rs.

Date
Particulars
Rs.
2002
1,00,000 Mar31 ByDepreciationA/c
5,000
(10%onRs.1,00,000
for6months)

ByBalancec/d
95,000
1,00,000
1,00,000
2003
95,000 Mar31 ByDepreciationA/c
9,500

ByBalancec/d
85,500
95,000
95,000
2004
85,500 Mar31 ByDepreciationA/c
(8550+500i.e.,
20,000
10%onRs.20,000
for3months)
9,050
ByBalanceC/d
96,450

1,05,500

ToBalanceb/d

96,450
154

1,05,500

155

DepreciationAccount

Dr.
Date

Particulars

2002
Mar31 ToMachineryA/c
2003
Mar31 ToMachineryA/c
2004
Mar31 ToMachineryA/c

Rs. Date

Cr.
Particulars

Rs.

2002
5,000 Mar31 ByProfit&LossA/c

5,000

5,000

5,000

2003
9,500 Mar31 ByProfit&LossA/c

9,500

9,500

9,500

2004
9,050 Mar31 ByProfit&LossA/c

9,050

9,050

9,050

Illustration:11
Machinerywaspurchasedon1.4.2000forRs.1,60,000.On
1.10.2000anothermachinerywaspurchasedforRs.80,000.On
30.9.2001 the second machine was sold for Rs.80,000.
AssumingthatthebooksareclosedonMarch31eachyearand
thedepreciationis10%underdiminishingbalancemethod.
PrepareMachineryaccountforthreeyears.
Solution:
Calculation of Profit or Loss on Sale of Machinery

Rs.
CostofMachinery(1.10.2000)
Less: Depreciationfor200001
Less: Depreciationtillthedateofsale(30.9.2001)
BookValueonthedateofsale

80,000
4,000
76,000
3,800
72,200

Asbookvalueislessthansellingpricethedifferenceisprofit.

1= 80,00072,200
@ Profit=Rs.7,800.
Ledger Accounts
MachineryAccount
Dr.
Date

Cr.
Particulars

2000
Apr1

ToBankA/c

Oct1

ToBankA/c

Rs.

Date

Particulars

2001
1,60,000 Mar31 ByDepreciationA/c
(16,000+4,000)
80,000

ByBalancec/d

2,40,000
2001

20,000
2,20,000
2,40,000

2001

Apr1 ToBalanceb/d
Sep30 ToProfit&Loss
A/c

2,20,000 Sep30 ByDepreciationA/c

(80,0004,000
7,800
=76,000on
Rs.76,000@
10%for6months)
Sep30 ByBankA/c
2002
Mar31 ByDepreciationA/c
(1,60,00016,000
=1,44,000on
Rs.1,44,000@
10%for1year)
Mar31 ByBalancec/d
2,27,800

2002
Apr1

Rs.

ToBalanceb/d

3,800
80,000

14,400
1,29,600
2,27,800

1,29,600

156

Q
UE
ST

157

IO
NS
I.Objective Type:

a)Fillintheblanks:
1.

2.

Allassetswhose
benefitisderived
for

a
__________
period of time
are called as
FixedAssets.
The estimated
salevalueofthe
asset at the end
ofitseconomic
life is called as
________value.

3.

________
method of
depreciation is
calculatedonthe
original cost of
asets.

4.

Under________
method,
depreciation is
calculatedonthe
book value of
the asset each
year.

5.

_______ method
ofdepreciationis
used in the case

ofLease.

6.

Under insurance
policy method,
cash is paid by
wayof_______

everyyear.
7.

________
method of
depreciation is
suitable for
special type of
asset like Loose
tools.

(Answeres:1.Long;2.
Residual/
Scrap;3.
Straight
line;4.
Written
down
value;5.
Annuity;
6.
Premium;
7.
Revaluatio
n)

b)Choosethe
correctanswer:
1.

Depreciation
arisesdueto

wear and
tear of the
asset
fall in the
market
value of
asset
fall in the
value of
money

3.

Under
diminishing
balance method,
depreciation
a) decreases
everyyear
b)increases
everyyear
3) constant
everyyear

Understraightline
method, rate of
depreciation is
calculatedon

4.

The

term
depletionisused
for
a) Intangible
assets
b)
Fixedassets
3) Natural
resources

5.

Ifsellingpriceis
more than the
book value of
the asset on the
dateofsale,itis
a) aloss b)an
income c)a

1)

2)

3)

2.

a) Originalcost
b)Written
downvalue

3)

Cost less
scrapvalue

profit

6.

If selling price is
lessthanthebook
value of the asset
itdenotes

a) loss b)
capitalprofit

depreciation
charged on a
machinery will
bedebitedto
a)
Machineryaccount
c)
Cashaccount

c)expenditure

7.

8.

9.

Profit made on
sale of fixed
asset is debited
to
a) Profitand
Lossaccount
b)FixedAsset
account
3) Deprecnatio
naccount

10. Total amount of

depreciation
provided on the
written down
value method at
the rate of 10%
p.a.

on
Rs.10,000 for
first three years
willbe
a) Rs.2,107
b)Rs.2,710
c)Rs.2,701

Loss on sale of
fixed asset
appearonthe
1) credit side
of
Depreciatio
naccount
2) debitsideof
fixed asset
account
3) credit side
of fixed
assetacount

(Answers :1.(a);2.
(a);3.(a);
4. (c); 5.
(c);6.(a);
7. (b); 8.
(c);9.(b);
10.(b))

The amount of
158

159

35. Other
Questions:

1.

Define

2.

Depreciatio
n.
What is
Fixed
Asset?

3.

4.

5.

6.

7.

What is
residual
value?
What is
obsolesence
?
Write notes
on
Effluxion
oftime.
What is
straight line
method of
depreciation
?
Write notes
on written
down value
method of
depreciation.

What is
Depreciatio
n Fund
Method of
depreciation
?
9. What is
Annuity
method of
depreciation
?
10. What is
8.

insurance
policy
method of
depreciation
?
11. Write notes
on
revaluation
method of
depreciation
.
12. Write the
formula to
calculate
rate of
depreciation
under
straight line
method.
13. What are
different
methods of
providing
depreciation
?
14. What are
the reasons
for
providing
depreciation
?
15. What are
the causes

of
depreciation
?
16. What are
merits and
demerits of
straight line
method of
depreciation
?
17. What are
merits and
demerits of
written down
value
method?

18. What are the

factors
determining
theamountof
depreciation?

III.Problems :
1.

A company
purchased
Furniture for
Rs.28,000.
Depreciation is
to be provided
annually
according to the
Straight Line
Method. The
usefullifeofthe

furniture is 5
years and the
residual value is
Rs.2,000.
Youarerequired
to findout the
amount of
depreciation.

(Answer:Rs

2.

From

the
following
particulars,
findout the rate
of depreciation,
under Straight
LineMethod.

(Answer:
RateofDep.
:9.6%)

4.

CostofFixed
Asset
Rs.
50,000
ResidualValue
Rs.5,000
EstimatedLife
10years
(Answer:Rate
ofDep.9%)

3.

A Plant has the

originalvalueof
Rs.5,00,000.The
scrapvaluein10
years time is
expected to be
Rs.20,000.
Determine the
rate

of
depreciation
when

the
management
wants

to
depreciate it by
Straight Line
Method.

A machine costing
Rs.3,00,000 is
estimatedtohavea
lifeof10yearsand
estimated scrap
value is Rs.20,000
at the end of its
life. Calculate the
rateofdepreciation
under the Straight
LineMethod.

(Answer:
Rateofdep:
9.3%)

5.

A machine was
purchased for
Rs.2,40,000 on
1.1.2000.Thisis
expected to last
for five years.
Estimated scrap
attheendoffive
years

is
Rs.40,000. Find
out the rate of
depreciation
under

the
Straight Line
Method.

(Answer:
RateofDep
:16.7%)

6.

Findouttherate
of depreciation
under straight
linemethod:
Costoftheplant
Installationcharges
Expectedlifeinyears
Scrapvalue
(Answer:Rate
160

S
c
r
a
p

v
a
l
u
e

R
s
.

1
,
0
0

ofDep:8%)

7.

From

the
following
particulars find
out the rate of
depreciation
under

the
Straight Line
Method.
Cost of assets:
Rs.10,000
161

0
.

E
s
t
i
m
a
t
e
d

l
i
f
e

1
0


y
e
a
r
s
.

8.

9.

A company
purchased a
Machinery for
Rs.12,000. Its
useful life is 10
years and the
scrap value is
Rs.1,200.
Determine the
rate

of
depreciation
undertheStraight
LineMethod.

10% p.a. on the

Straight Line
Method.On30th
June, 1998 the
machinery was
found to be
unsuitable and
sold

for
(June2003)(Answer:9%)
Rs.52,000.
Assume that the
accounts are
closed on 31st
December every
year.

Pass the journal

entries and
prepare
Machinery
account and
Depreciation
accountforthree
years.
(
(March2003)(Answer:9%)
Oct
Sudha & Co.,
obe
purchased a
r
Machinery for
200
Rs.64,000 on 1st
2)
April 1996. They
(An
spent Rs.28,000
swe
ontherepairsand
r:
installedthesame.
Los
Depreciation is
son
writtenoff at

sale
of
mac
hine
ry
Rs.
19,3
00)

10. Sunil & Co.

purchased a fixed
asset on 1.4.2002
for Rs.5,00,000.
Depreciation is to
beprovidedatthe
rate of 15%
annually

according to the
Straight Line
Method. The
booksareclosed
on 31st March
everyyear.
Passthe
necessary
journalentries,
prepareFixed
assetaccount
andDepreciation
accountforthe
firstthreeyears.
(Answer:
Balanceat
theendof

thirdyear
Rs.
2,75,000)

11. M/s. Shankar &

Co. purchased a
Machinery on
1.1.2002for
Rs.10,00,000.
The firm writes
off depreciation
at 10% on the
original cost
every year. The
booksareclosed
on 31st March
everyyear.

Passthe
necessary
journalentries,
prepare
Machinery
accountand
Depreciation
accountforthe
firstthreeyears.

account and
Depreciation
accountforthree
years.

(Answer:
Balanceatthe
endofthethird
year:Rs.
7,75,000)

13. On 1st April,

2001, Excel
Company
Limited
purchased a
machine for
Rs.56,000. On
the date of
purchase it was
estimated that
the effective life
of the machine
will be 10 years
and after 10
years its scrap
value will be
Rs.6,000.

12. Ganesh & Co.

purchased a
Machinery worth
Rs.3,00,000on1st
October 2000.
They

spent
Rs.20,000 on its
erection.Thefirm
writes

off
depreciationatthe
rateof10%onthe
originalcostevery
year. The books
areclosedon31st
March of every
year.

Prepare
Machinery

(Answer:
Balanceatthe
endofthethird
year:Rs.
2,40,000)

PrepareMachine
Account and
Depreciation
Account for
three years,
Depreciation is

charged on
Straight Line
Method.
Accounts are
closed on 31st
March of every
year.
(
A
n
s
w
e
r
:
D
e
p
r
e
c
i
a
t
i
o
n

a
m
o
u
n

t
:
R
s
.
5
,
0
0
0
.
B
a
l
a
n
c
e
a
t
t
h
e
e
n
d

o
f
t
h
i
r

y
e
a
r
:
R
s
.
4
1
,
0
0
0
)
.

at 10% p.a.
using Straight
Line Method.
The firm closes
its book on 31st
March of every
year.
(Answer:
Balanceat
theendof
thirdyear
Rs.3,12,00
0)

15. A

garment
company
purchased a Plant
on 1st April 2001
for Rs.1,00,000.
After having used
itforthreeyearsit
wassoldfor

14. Senthil purchased

Machinery

for

Rs.4,00,000 on 1st

Rs.80,000.
Depreciation is
tobeprovidedat
the rate of 10%
per annum on
Fixed Instalment
Method.
Accounts are
closed on 31st
March every
year.

April 2000. On 1st

April 2001, an
additional
machinery was
purchased for
Rs.40,000. Prepare
the Asset account
for three years.
Depreciation
162

istobeprovided
Findoutthe

163

ProfitorLosson

saleofPlant.
(
A
n
s
w
e
r
:

P
r
o
f
i
t

o
n

s
a
l
e

o
f

p
l
a
n
t

R
s

.
1
0
,
0
0
0
)

16. Gayathri
Garments
purchased a Plant
on 1.4.2000 for
Rs.2,40,000. After
three years the
plantwassoldfor
Rs.1,50,000.

Thefirmcharges
depreciation at
the rate of 10%
per annum on
straight line
method.
Accounts are
closed on 31st
March every
year.
PassJournal
entries,prepare
Plantaccount
andDepreciation
account.
(
A
n

s
w
e
r
:
L
o
s
s
o
n
s
a
l
e
o
f
P
l
a
n
t
R
s
.
1
8
,
0
0
0
)

17. Kumaran
Brothers
purchased

Machinery on
1.1.2000 for
Rs.5,00,000. On
1.1.2002 the
machinery was
sold

for
Rs.4,00,000. The
firm charges
depreciation at
therateof15%
per annum on
Straight Line
Method. The
booksareclosed
on 31st March
everyyear.

Prepare
Machinery
account and
Depreciation
account.
(Ans
wer:
Profi
ton
sale
of
mac
hine
ry
Rs.5
0,00
0)

18. Michel & Co.

purchased a
secondhandplant
forRs.4,70,000on
1st July 2001.
They

spent
Rs.30,000 on the
repairs

and
installed

the

plant.
Depreciation is
written off at
10% p.a. on the
Straight Line
Method.On30th
September2003,
the plant was
found to be
unsuitable and
sold

for
Rs.3,50,000.
Prepare Plant
account and
Depreciation
account for three
years assuming
that the accounts
areclosedon31st
Marcheveryyear.

(
A
n
s
w
e
r

:
L
o
s
s
o
n
s
a
l
e
o
f
p
l
a
n
t
R
s.
3
7
,
5
0
0
)

19. A company
purchased a
Machinery on
1.4.2001 for
Rs.2,40,000. On
1st October2002,
it purchased
another

machinery for
Rs.60,000.On1st
October 2003, it
sold off the first
machine
purchased on
1.4.2001 for
Rs.1,68,000. On
the same date, it
purchased
another
machinery for
Rs.1,50,000.

Accountsare
closedevery
yearon31st
March.
Depreciationis
writtenoffat
10%p.a.on
originalcost.
Prepare
Machinery
accountand
Depreciation
accountforthree
years.
(An
s
w
er
:
L
os
s
on
sa
le
of
m
ac
hi
ne
ry
Rs
.1

2,
0
0
0.
B
al
a
nc
e
at
th
e
en
d
of
th
ir
d
ye
ar
:
R
s.
1,
9
3,
5
0
0)

20. Akbar & Co.

purchasedaplant
for Rs.80,000 on
1.4.2001.Itis

depreciated at
10% p.a. on
reducingbalance
methodforthree
years. Accounts
areclosedon31st
March every
year.
Pass the Journal
entries, prepare
Plant account
andDepreciation
accountforthree
years.
(Answer:
Balance
attheend
ofthird
year
Rs.58,32
0)

21. Bhaskar &

Brothers
purchased a
Machinery on
1.12.2002for
Rs.5,70,000. The
firm writes off
depreciation at
10% on reducing
balance method.
The books are
closed on 31st
Marcheveryyear.

Pass

the
necessary
journal entries,
prepare
Machinery
account and
Depreciation
account for the
firstthreeyears.
(Answer:
Balanceat
theendof
thirdyear
Rs,4,46,31
0)

March
year.

(Answer:
Balanceat
theendof
thirdyear
Rs.3,68,64
0)

23. Archana started

business on 1st
April 2001 and
shepurchaseda

165

Theaccountsare
closed every

every

Prepare Plant
account and
Depreciation
account for three
years.

22. On 1st October

2000, a company
purchasedaplant
for Rs.6,00,000.
They spent
Rs.40,000 on its
erection.Thefirm
writes

off
depreciation at
the rate of 20%
on Reducing
Balance Method.
The books are
closed on 31st
164

Machinery for
Rs.1,40,000.She
purchased
another
machineryon1st
November 2002
costing
Rs.30,000. She
adoptedapolicy
ofcharging15%
p.a. depreciation
under
Diminishing
BalanceMethod.
year on 31st
March. Prepare

Machinery
account and
Depreciation
account for the
firstthreeyears.
(Answer:
Balanceat
theendof
thirdyear
Rs.1,09,88
4)
24. Abdulpurchaseda
Machinery on 1st
April 2001 for
Rs.2,00,000. After
havingused it for
three years it was
sold

for
Rs.1,60,000.

Depreciation is
tobeprovidedat
the rate of 10%
p.a.

on
Diminishing
BalanceMethod.
Accounts are
closed on 31st
March of every
year.
Find out the
ProfitorLosson
sale

of
machinery.

(Ans
wer:
Profi
ton
sale
of
mac
hine
ry
Rs.1
4,20
0)

25. Sivam Printing

Press purchased
a

printing
machinery
costing
Rs.3,00,000 on
1.4.2001. After
three years the
machinery was
sold

for
Rs.2,80,000.The
firm charges
depreciation @
10% per annum
on Diminishing
BalanceMethod.
Accounts are
closed on 31st
March every
year.
Pass journals,

prepare
Machinery
account and
Depreciation
account.
(Ans
wer:
Prof
iton
sale
of
mac
hine
ry
Rs.6
1,30
0)

26. A firm bought a

machinery on
1.1.2002 for
Rs.5,00,000. On
31.12.2003 the
machinery was
sold

for
Rs.3,90,000. The
firm
charges
depreciation at the
rate of 10% per
annum

on
Diminishing
Balance Method.
The books are
closed on 31st

Marcheveryyear.

Pass journal
entries, prepare
Machinery
account and
Depreciation
account.
(An
swe
r:
Los
s
on
sal
eof
ma
chi
ner
y
Rs.
15,
844
)

27. Chennai Printing

House purchased
a Machinery for
Rs.4,60,000on1st
July2001.Itspent
Rs.40,000 on the
repairs

and
installed
the machinery.
Depreciation is
writtenoffat10%

p.a.

on
Diminishing
Balance Method.
On 31st October
2003,

the
machinery was
found to be
unsuitable and
sold

for
Rs.4,10,000.

Prepare
Machinery
account and
Depreciation
accountforthree
years assuming
thattheaccounts
areclosedon31st
March every
year.
(Ans
wer:
Profi
ton
sale
of
mac
hiner
y
Rs.1
8,03
1)

28. A

Limited
company
purchased a
Machinery on
1.6.2001 for
Rs.2,10,000. On
1st October 2003,
it purchased
anothermachinery
for Rs.1,00,000.
On 1st October
2003, it sold off
the

first machinery
purchased on
1.6.2001 for
Rs.1,80,000.
Accounts are
closed every year
on 31st March.
Depreciation is
writtenoffat10%
per annum on
Diminishing
BalanceMethod.

Prepare
Machinery
accountand
Depreciation
accountforthe
firstthreeyears.
(Ans
w
er
:
P
ro
fit
o
n
sa
le
of
m
a
c

hi
n
e
R
s.
1
5,
4
1
3
B
al
a
n
ce
at
th
e
e
n
d
of
th
ir
d
ye
ar
R
s.
9
5,
0
0

0)

29. A plant is
purchased for
Rs.90,000. It is
depreciated as
10% p.a. on
reducingbalance
for three years.
Whenitbecomes
obsolete due to
new method of
productionandis
scrapped. The
scrap produces
Rs.66,000 at the
end of the third
year.
Prepareplant
anddepreciation
accountforthree
years.
(A
ns
we
r:
Pr
ofit
on
sal
e
of
pla
nt

Rs.
39
0)

30. On 1st January

2003,Ramesh&
Co., purchased
plant worth
Rs.1,00,000 was
sold away on
31st December
2004

for
Rs.50,000.
Depreciationwas
providedat20%
p.a. on the
written down
valueeveryyear.
Accounts are
preparedon31st
March every
year.
Show the plant
account and
depreciation
account for three
years.

(
A
n
s
w
e
r

:
L
o
s
s
o
n

s
a
l
e

o
f
p
l
a
n
t
166

R
s
.
1
4
,
6
0
0
)

31. Alexander
Company Limited
purchased a plant
forRs.1,80,000on
1st January 2003.
They spent Rs.
20,000

for
installation
167

expenses.Depreciationistobeprovided@10%p.a.onthe
deminishingvaluemethod.
Prepareplantaccountanddepreciationaccountforthree
yearsending31stMarcheveryyear.
(Answer:BalanceattheendofthirdyearRs.1,57,950)

168

Chapter 4

FINANCIAL STATEMENT ANALYSIS RATIO ANALYSIS

Learning Objectives

AfterstudyingthisChapter,youwillbeableto:
1 understandthemeaning,significanceandlimitations
offinancialstatementanalysis.
2 calculateliquidity,solvency,profitabilityandactivity
ratios.
Financial statements are final result of accounting work
done during the accounting period. Financial statements
normallyincludeTrading,ProfitandLossAccountandBalance
Sheet.Theusersofaccountinginformationmaynotbeableto
getdirectreplytocertainquestionsfromtheabovestatements.
However,byexpressingtheitemsinthefinancialstatements,in
relationtoeachotherwecangetmeaningfulinformation.
Analysis of financial statement has been defined as a
process ofevaluatingtherelationshipbetweenthecomponent
partsofthefinancialstatementstoobtainabetterunderstanding
ofafirmspositionandperformance.
Financialstatementanalysisisanimportantpartoftheoverall
financialassessment.Thedifferentuserslookatthebusinessconcern

169

from their respective

view point and are
interestedinknowing
aboutitsprofitability
and

financial
condition.Adetailed
cause and effect
study of the
profitability and
financialconditionis
the overall objective
offinancialstatement
analysis.
4.1 Significance of
Financial
Statement
Analysis:
1.

2.

Judging the
earning
capacity or
profitability
of

a
business
concern.
Analysing
the short
term and
long term
solvency of
thebusiness

concern.
3.

Helps in
making
comparative
studies
between
variousfirms.

4.

Assists in
preparing
budgets.

4.1.1 Limitations of
Financial Statement
Analysis:

Analysis of
financial statements
helpstoascertainthe
strength

and
weakness of the
businessconcern,but
at the same time it
suffers from the
followinglimitations.
1.

2.

It analyses
what has
happened
tilldateand
does not
reflect the
future.
It ignores

price level
changes.
3.

4.

5.

6.

Financial
analysis
takes into
consideratio
n only
monetary
matters,
qualitative
aspects are
ignored.
The
conclusions
of the
analysis is
basedonthe
correctness
of the
financial
statements.
Analysis is
a means to
an end and
not the end
itself.
As there is
variation in
accounting
practices
followedby
different
firms a

valid
comparison
of their
financial
analysis is
not
possible.
There

are
different ways by
which financial
statement analysis
can be undertaken
andoneamongthem
isRatioAnalysis.
Inthischapterweare
discussing the Ratio
Analysis.

4.2 Ratio
Analysis:
Ratio is an
expression of one
number in relation to
another.
Ratio
analysisistheprocess
of determining and
interpreting

the
numerical relationship
between figures of
financialstatements.A
ratioisamathematical
relationship between
twoitemsexpressedin
a quantitative form.
An absolute figure
doesnotconveymuch
meaning. Generally,
withthehelpofother
relatedinformationthe
significance of the
absolute figure could
beunderstoodbetter.
ForexampleNila
earnsRs.50,000profit
in her business while
Nivedita

earns
Rs.40,000 profit.
Whose business is
more profitable?

Instantly we may say

thatasNilaearnsmore
profit, her business is
moreprofitable.Butin
order to answer this
question we must
know what was the
salesmadebybothof
them. Suppose Nila
has made a sale of
Rs.4,00,000 and
Nivedita Rs.3,00,000.
Nowwecancalculate
the percentage of
profit earned on the
sales (Profit / Sales x
100) to know whose
business is more
profitable.

50,000
Nila

=x100=

4,00,000

12.5

40,000
Nivedita

=x100=

3,00,000

From the above

calculationsitisclear
that the profitability
of Nivedita is more
than Nila, because,
sheisgetting13.33%

13.33

return and Nila is

gettingonly12.5%.

meaningful
information. Hence,
business results are
understood properly
only when the
relevant figures are
consideredtogether.

Thus, the above

exampleexplainsthat
absolute figures by
themselves may not
communicate
170

4.2.1 Definition:

In the words of
Kennedy and Mc
Millan
the
relationship of an
item to another
expressed in simple
mathematicalformis
knownasaratio
Expression of Ratios:

Ratiosareexpressed
inthreeways:
18. Time: In this
type

of
expression one
number
is
divided by
another number
and the quotient
is taken as

171

numberoftimes.
For example,
expressing the
attendance of 40
students present
in a class of 80
students would
be:
40

0
.
5

t
i
m
e
s

8
0
2.

Percentage:Itis
expressed in
Percentage.
When the above
example is
expressed as
percentage, it
would be as
under

proportion. In
the

above
example, this
would be as
under
4
0
1

0
.
5

40

1
0
0

5
0
%

8
0
3.

Pure: It is
expressed as a

80

Thismayalsobe
expressedas
0.5:1.
Thestudyof
relationshipsbetween
variousitemsorgroups
ofitemsinfinancial

statementsisknownas
FinancialRatio
Analysis.

4.2.2 Objectives:
The objectives of
usingratiosaretotestthe
profitability, financial
position (liquidity and
solvency) and the
operating efficiency of a
concern.

4.2.3 Advantages of
Ratio Analysis:

Ratio analysis is
an

important
techniqueinfinancial
analysis.Itisameans
for judging the
financial soundness
of the concern. The
advantages

of
accounting ratios are
asfollows:
1. Itisanuseful
device for
analysing the
financial
statements.

2. Itsimplifies,
summarizes
the
accounting
figures to
make it

understanda
ble.
3. It helps in
financial
forecasting.
4. It facilitates
interfirmand
intrafirm
comparisons
.
Ratioanalysis is
useful in finding the
strength

and
weakness of a
business concern.
After identifying the
weakness, the ratios
are also helpful in
determining the
causes of the
weakness.
4.2.4 Classification
of Ratios:
Theclassification
ofratiosonthe
basisofpurposeis
asfollows:

Ratios

Liquidity

Solvency

1. Current Ratio 1. Debt-Equity Ratio

2. Liquid Ratio 2. Proprietory Ratio
3. Absolute Liquid Ratio

Profitability

1. Gross Profit Ratio 1. Capital Turnover Ratio

2. Net Profit Ratio 2. Fixed Asset
3. Operating Profit Ratio
Turnover Ratio
4. Operating Ratio 3. Stock Turnover Ratio
4. Debtors Turnover Ratio
5.Creditors Turnover Ratio

172

I.Liquidity Ratios
Liquidity Ratios
measure the firms
ability to pay off
current dues i.e.,
repayable within a
year. Liquidity ratios
areotherwisecalledas
Short Term Solvency
Ratios. The important
liquidityratiosare

Activity
(Turnover)

173

ability to meet its

currentliabilities.The
relationship

of
current assets to
current liabilities is
known as current
ratio. The ratio is
calculatedas:
Current
Assets
Current
Ratio
=

1. CurrentRatio
2. LiquidRatio
3. Absolute
LiquidRatio
1. Current Ratio :
Thisratioisused
to assess the firms

Current
Liabilities
Current Assets
are those assets,
which are easily
convertible into cash
withinoneyear.This
includescashinhand,

cash at bank, sundry

debtors,

bills
receivable,shortterm
investment

or
marketablesecurities,
stock and prepaid
expenses.

Solution:
CurrentRatio
CurrentAssets

Current
Liabilities are those
liabilities which are
payable within one
year. This includes
bank overdraft,
sundrycreditors,bills
payable

and
outstandingexpenses.

= Stock+S
andbank
investme

= 36,500+
+30,000

= Rs.1,50

CurrentLiabilities= Bankov
+Billsp

= 20,000+

= Rs.75,0
CurrentRatio

Illustration:1
Fromthe
following
computecurrent
ratio:
Stock
SundryDebtors
Cashinhand&bank
Billsreceivable
Shortterminvestments

Curren
=
Current

1,50,00
=
75,00
= 2:1

2. Liquid Ratio

Rs.
36,500
63,500
10,000
9,000
30,000

Thisratioisused
to assess the firms
short term liquidity.
The relationship of
liquid assets to
current liabilities is
known as liquid
ratio. It is otherwise
calledasQuickratio

or Acid Test ratio.

Theratioiscalculated
as:

Current
Liabiliti
es

Liquid
Assets
Liquid
Ratio=

174

Illustration:2

Liquid assets
means current assets
less stock and
prepaidexpenses.
175

Takingthe
figuresfromthe
aboveillustration
liquidratiois
calculatedasfollows:
Solution:
LiquidRatio

LiquidAssets

LiquidAssets 3. Absolute
Ratio
Currentliabilities

.
5

Liquid

It is a modified

CurrentAssets(Stock+Prepaid
formofliquidratio.The
expenses)

relationship of absolute

=1,50,000(36,500+1,000)
liquid assets to liquid
=

1,50,00037,500liabilities is known as

Rs.1,12,500
1,12,500

LiquidRatio

=
1= 1

75,000

absolute liquid ratio.

This ratio is also called
asSuperQuickRatio.
The ratio is calculated
as:

Absolute

Liquid
Assets
Absolute
Liquid
Ratio=

Illustration:3
Takingthe
figuresfrom
Illustration:1
Solution:
Abs
olute
Liqu
id
Asse
ts

Liquid
Liabilities
Absolute liquid
assets means cash,
bank and short term
investments. Liquid
liabilities
means
currentliabilitiesless
bankoverdraft.

AbsoluteLiquid
Ratio=

Liquid
liabilitie
s
AbsoluteLiquid
Assets=Cash+Bank
+Shortterm
investments

= 10,000+

= Rs.40,0
LiquidLiabilities

= Currentli

= 75,000

= Rs.55,0

40,000

important solvency
AbsoluteLiquidRatio = =0.73:1
55,000
ratios:

(Note:Allliquidity
ratiosareexpressed
asaproportion)

1.
2.

II. Solvency Ratios

1. Debt Equity Ratio

Solvencyrefersto
the firms ability to
meet its long term
indebtedness. Solvency
ratio studies the firms
abilitytomeetitslong
term obligations. The
following are the

Thisratiohelpsto
ascertainthesoundness
ofthelongterm
financialpositionofthe
concern.Itindicatesthe
proportionbetweentotal
long
176

term debt and

shareholders funds.
This also indicates
the extent to which
the firm depends
uponoutsidersforits
existence.Theratiois
calculatedas:
Total
long
term
Debt
DebtEquity
Ratio=

DebtEquity
Ratio
Proprietory
Ratio

177

Shareho
lders
funds

Total long term

debt
includes
Debentures, long term
loans from banks and
financial institutions.
Shareholders funds
includes Equity share
capital, Preference
share capital, Reserves
andsurplus.

1= 1,
25
,0
00
+
25
,0
00

Illustration:4
CalculateDebt
EquityRatiofrom
thefollowing
information.

Debentures
LoanfromBanks
Equitysharecapital
Reserves
Solution:
TotalLongTermDebt
DebtEquityRatio =
3
,
0

Totallongtermdebt= Debentures+LoansfromBank
0
,

= 2,00,000+1,00,000
= Rs.3,00,000

0
0
0

Shareholdersfunds = EquityShareCapital+Reserves

D
e
b
t

E
q
u

2= Rs
.
1,
50
,0
00

Theratioiscalculated
as:

i
t
y

R
a

hareholders
funds
(Proprietors
funds)
Proprietory
Ratio=

t
i
o

Total
tangible
assets

Tangibleassets
willincludeallassets
exceptgoodwill,
preliminaryexpenses
etc.

2
:
1

1,50,00
0
2. Proprietory Ratio
Thisratioshows
therelationship
betweenproprietorsor
shareholdersfundsand
totaltangibleassets.

Illustration:5
Fromthe
following
calculate
ProprietoryRatio

Rs.
Equitysharecapital 1,00,000
Preferencesharecapital75,000
Reserves&surplus
25,000
Machinery
30,000
Goodwill
5,000

Rs.
10,000
20,000
25,000
15,000

Furniture
Bank
Cash
Stock

Solution:
Shareholdersfunds
ProprietoryRatio

Totaltangibleassets
178

Shareholdersfund
=Equitycapital+
PreferenceShare
Capital

+
Rese
rve
&
Surp
lus
1= 1,
0
0,
0
0
0
+
7
5,
0
0

179

0
+
2
5,
0
0
0
2= R
s.
2,
0
0,
0
0
0

Totaltangible
assets=
Machinery+
Furniture+Bank
+Cash

1+

Stoc
k

0,
0
0
0

2= 3
0,
0
0
0
+
1
0,
0
0
0
+
2
0,
0
0
0
+
2
5,
0
0
0
1+
15,0
00

III. Profitability
Ratios

3= R
s.
1,
0

Efficiency of a
businessismeasuredby
profitability.
Profitability ratio

2
,0
0,
00
0
=

=
2:
1

1,00,00
0
(Note:All
solvencyratios
areexpressedas
aproportion.)

measures the profit

earningcapacityofthe
business concern. The
important profitability
ratios are discussed
below:

1. Gross Profit
Ratio
2. Net Profit
Ratio
3. Operating
ProfitRatio
4. Operating
Ratio
1. Gross
Ratio

Profit

This

ratio
indicates

the
efficiency of trading
activities.

The
relationship of Gross
profit to Sales is
known as gross
profit ratio. The
ratioiscalculatedas:

Gross
Profit
GrossProfit
Ratio=

x100

Sales
Gross profit is
taken from the
TradingAccountofa
business concern.
Otherwise Gross
profit can be
calculated

by
deducting cost of
goods sold from
sales. Sales means
Netsales.
GrossProfit
=Sales
Costofgoodssold

Costofgoods
sold
=
OpeningStock+
Purchases

Closing
Stock
(or)
Sales

Gross
Profit

5
,
0
0
0

5
,
0
0
0

Illustration:6
Fromthe
following
particulars
ascertaingross
profitratio
Cashsales
Creditsales

Rs.
40,000
65,000

Solution:
Gross
Profit

2= R
s
.

1
,
0
0
,
0
0
0

GrossProfit
Ratio
=
x100

Sales
Sales
=
TotalSales
SalesReturns
1= 4
0
,
0
0
0

40,000
=

x
10
0
=

40
%
1,0
0,0
00
180

2. Net Profit Ratio:

This

ratio
determines

the
overall efficiency of
the business. The
relationship of Net
profit to Sales is
known as net profit
ratio. The ratio is
calculatedas:
NetProfit
Net
Profit
Ratio=

x
100

181

concern

less
administration
expenses, selling and
distribution expenses
andfinancialexpenses.

Illustration:7
Calculatenet
profitratiofrom
thefollowing:

Rs
NetProfit

60,00

Sales

3,00,00

Solution:
Sales

Netprofitistaken
from the Profit and
Loss account of the
businessconcernorthe
gross profit of the

NetProfitRatio

Net

60,000
1=

1
0
0

3. Operating Profit
Ratio

This ratio is an
indicator of the
operationalefficiency
ofthemanagement.It
establishes

the
relationship between
Operating profit and
Sales. The ratio is
calculatedas:

Operating
Profit

0
0
,
0
0

Operating
Profit
Ratio=

x100
Sales

2=
20
%

Whereoperating
profitisNetprofit
+Nonoperating
expenses

Nonoperating
income.
Where, Non
operating expenses
are interest on loan
and loss on sale of
assets.

Nonoperating
incomearedividend,
interestreceivedand
profitonsaleofasset.
(or)Operatingprofit
=Grossprofit
Operatingexpenses.
Operating
expenses
include
administration,
selling

and
distribution expenses.
Financial expenses
like interest on loan
are excluded for this
purpose.
Illustration:8
Calculatethe
operatingprofit
ratiofromthe
following:

NetProfit
LossonSaleofFurniture
Profitonsaleofinvestments
Interestpaidonloan
Interestfrominvestments
Sales
182

Rs.
3,00,000
10,000
30,000
30,000
20,000
5,80,000
183

Solution:
OperatingProfit
= x100
Sales

OperatingProfitRatio
Operatingprofit

= Netprofit+Nonoperatingexpenses
Nonoperatingincome.

Nonoperatingexpenses =

Interestonloan+Lossonsale
offurniture.

= 30,000+10,000
= Rs.40,000
Nonoperatingincome

Interestreceivedfrominvestments+
Profitonsaleofinvestment

= 20,000+30,000
= Rs.50,000
Operatingprofit

3,00,000+40,00050,000

1= Rs.2,90,000
2,90,000
OperatingProfitRatio=x100

5,80,000
1= 50%
4. Operating Ratio
This ratio determines the operating efficiency of the business
concern.Operatingratiomeasurestheamountofexpenditureinurredin
production,salesanddistributionofoutput.Therelationshipbetween

OperatingcosttoSalesisknownasOperatingRatio.Theratio
iscalculatedas:
Costofgoodssold+
Operatingexpenses
OperatingRatio

=x100
Sales

Illustration:9
Fromthefollowingdetails,calculatetheoperatingratio.
Rs.
Costofgoodssold
6,00,000
Operatingexpenses
40,000
Sales
8,20,000
Salesreturns
20,000
Solution:
Costofgoodssold+
Operatingexpenses
OperatingRatio

=x100

Sales
=

6,00,000+40,000
x100
8,20,00020,000
6,40,000

OperatingRatio=x100=80%

8,00,000
(Note:Allprofitabilityratioswillbeexpressedintermsofpercentage.)

184

IV. Activity Ratios

Activity ratios
indicate

the
performance of the
business.

The
performance of a
business is judged
with its sales
(turnover) or cost of
goods sold. These
ratios are thus
referred to as
turnover ratios. A
few

important
activity ratios are
discussedbelow:
1. Capital
turnoverratio
2. Fixed assets
turnoverratio
3. Stock
turnoverratio
4. Debtors
turnoverratio
5. Creditors
turnoverratio
1. Capital Turnover
Ratio

This shows the

number of times the

185

capital has been

rotatedintheprocess
of carrying on
business. Efficient
utilisation of capital
would lead to higher
profitability. The
relationship between
Sales and Capital
employed is known
as CapitalTurnover
Ratio. The ratio is
calculatedas:
Sales
Capital
Turnover
Ratio=

Capital
Employed
Where
Sales
meansSaleslesssales
returns and Capital
employed refers to
totallongtermfunds
of the business
concern i.e., Equity
share

capital,
Preference share

capital, Reserves and

surplus and Long
termborrowedfunds.
Illustration:10
Calculatecapital
turnoverratio
fromthe
following
information

Salesreturn
EquityShareCapital
Longtermloan
Reserves
Solution:
CapitalTurnoverRatio

NetSales

= Ca

Cashsales
Creditsales

= 2,

= Rs
CapitalEmployed

= Sh
+

= 1,

= Rs
CapitalTurnoverRatio
2. Fixed Assets
Turnover Ratio:

This shows how

best the fixed assets
are being utilised in
the business concern.
The relationship
between Sales and
Fixedassetsisknown

3
=
1

as
Fixed assets
turnover ratio. The
ratioiscalculatedas:

Fixedassets
Fixedassets
meansFixed
assetsless
depreciation.

Sales
Fixedassets
turnover
Ratio=

186

Illustration:11
Calculatethefixed
assetturnoverratio
fromthefollowing
figures.

Sales
SalesReturn
Fixedassets
Solution:
Fixedassetsturnoverratio
Sales

187

3. Stock Turnover
Ratio

This ratio is
otherwise called as
inventory turnover
ratio. It indicates
whether stock has
been efficiently used
ornot.Itestablishesa
relationship between
thecostofgoodssold
during a particular
period and the
average amount of
stockinthe concern.
Theratioiscalculated
as:

Costofgood
sold
Fixedassetsturnoverratio

Stock
turnover
ratio=

Open
ing
stock
+
closin
g
stock

Averagestock

Averagestock
=

2
Ifinformationto
calculateaverage
stockisnotgiven
thenclosingstock
maybetakenas
averagestock.
Illustration:12
Calculatestock
turnoverratio
fromthe
following:

Rs.
Costofgoodssold

6,75,000

Stockatthebeginningoftheyear

1,00,000

Stockattheendoftheyear

1,25,000

Solution:
Costofgoodssold
Stockturnoverratio =

Averagestock
OpeningStock+ClosingStock

Averagestock

2
1,00,000+1,25,000

2,25,000
=
2
=Rs.1,12,500
6

188

189

Calculatestock
turnoverratio
fromthe
following
information.

e
r

r
a
t

Sales

i
o

Grossprofit

Stock

Solution:

Stockturnoverratio

Cos
=
A

Costofgoodssold

= Sales

= 2,00

= Rs.1

Stockturnoverratio

4. Debtors
Turnover Ratio

i
m
e
s

1,12,500
Illustration:13

This establishes
the relationship
between credit sales
andaverageaccounts
receivable. Debtors

1
=

turnover

ratio
indicates

the
efficiency of the
business concern
towardsthecollection
of amount due from
debtors. The ratio is
calculatedas:

CreditSales
Debtorsturnover
Ratio=

Average
Accounts
Receivabl
e
Accounts
receivableincludes
sundrydebtorsand
billsreceivable.

Opening
(debtors
+bills
receivabl
e)+
Closing
(debtors
+bills
receivabl
e)

Averageaccounts
receivable=

2
Incasecreditsalesis
notgiven,totalsales
canbetakenascredit
sales.

Illustration:14

2,00,
000
40,00
0

Calculate
Debtorsturnover
ratiofromthe
following:

=
Rs.
Rs.

Rs.1,
60,00
0

Totalsales
2,00,000
Cashsales
40,000
Openingdebtors
35,000
Closingdebtors
45,000

Opening
Debtors+
Closing
Debtors

AverageDebtors
=

Solution:

2
Creditsales

35,000+
45,000
1=

Debtors
TurnoverRatio=

Average
debtors
CreditSales
=Totalsales
Cashsales
=
8
0,000
=

190

191

1= R
s.
4
0,
0
0
0
1
,
6
0
,
0
0
0

D
e
b
t
o
r
s

T
u
r
n
o
v
e
r

R
a
t
i
o

T
i
m
e
s

40,000
5. Creditors
Turnover Ratio:
Thisestablishesthe
relationship between
credit purchases and
average

accounts
payable. Creditors

turnover ratio indicates

the period in which the
payments are made to
creditors. The ratio is
calculatedas:

Solution:
Credit
Purchases

Creditorsturnoverratio =

Creditors
TurnoverRatio
=

Average
accounts
Accountspayableincludesundrycreditorsandbillspayable. payable

Averageaccountspayable

Opening(creditors+billspayable) 36,000+
+Closing(creditors+billspayable) 24,000
=
AverageCreditors
=

In case credit
purchases is not
giventotalpurchases
canbetakenascredit
purchases.
Illustration:15
Calculate
creditors
turnoverratio
fromthe
following:
Creditpurchases
Openingcreditors
Closingcreditors

2
60,000
=

=Rs.
30,000
2
1,50,000
=

=5

Ti
me
s
30,
00
0

(Note:Allturnover
ratioswillbe
expressedintermsof
times.)
Other
Illustrations:
Illustration:16
Fromthe
following
calculatecurrent
ratio
Ba
bu
Co
.
Lt
d.

Bal
anc
e
She

et
as
on
31.
3.0
4

Liabilities
Sharecapital
Reserves
BankOverdraft
Creditors

Rs.
21,000
4,000
2,000
6,000

Assets

Rs.

FixedAssets
Stock

17,000
6,000

Debtors
Cash

3,200
6,800

33,000
192

33,000
193

Solution:
CurrentRatio

CurrentAssets
=
CurrentLiabilities

CurrentAssets

= Stock+Debtors+Cash

P
a
vi
th
ra
C
o.
Lt
d.

=6,000+3,200+6,800
= Rs.16,000
CurrentLiabilities = Bankoverdraft+Creditors
= 2,000+6,000
= Rs.8,000
16,000
= =2:1
8,000
Illustration:17
Fromthe
followingBalance
Sheetason31.3.2005,
calculatecurrentratio
andliquidratio.

Liabilities
Equitysharecapital
Profit&LossA/c

Ba
lan
ce
Sh
eet
as
on
31.
3.0
5
Rs.
40,000
4,000

Debentures
Creditors

25,000
24,000
93,000

Solution:
CurrentRatio
CurrentAssets

CurrentAssets
=
CurrentLiabilities
= Stock+Debtors+Cash
+Prepaidexpenses
=22,000+19,000+15,000+20,000
= Rs.48,000

Currentliabilities = Creditors
= Rs.24,000
CurrentRatio

48,000
= =2:1
24,000

LiquidRatio

LiquidAssets
=
CurrentLiabilities

LiquidAssets

= CurrentAsset(Stock+Prepaid
expenses)
=48,000(22,000+2,000)
= 48,00024,000
= Rs.24,000

LiquidRatio

24,000
= =1:1
24,000
194

195

Illustration:18
Fromthefollowing,calculateDebtEquityRatio.
Rs.
Equityshares
1,00,000 Generalreserves
Debentures
75,000 Sundrycreditors
Outstandingexpenses
10,000

Rs.
75,000
40,000

Solution:
DebtEquityratio

LongtermDebt
=
Shareholdersfunds

LongtermDebt

= Debentures
= Rs.75,000

Shareholdersfunds

= Equityshares+GeneralReserves
= 1,00,000+75,000
= Rs.1,75,000

DebtEquityratio

75,000
=0.42:1
1,75,000

Illustration:19
CalculateGrossProfitRatiofromthefollowing:
Rs.
Purchases
Openingstock
Closingstock
Sales
Solution:

2,65,000
10,000
20,000
3,00,000

GrossProfitRatio

GrossProfit
= x100
Sales

GrossProfit

= SalesCostofGoodsSold

Costofgoodssold

= Openingstock+Purchases
Closingstock
=10,000+2,65,00020,000
= Rs.2,55,000

GrossProfit

= 3,00,0002,55,000
= Rs.45,000

GrossProfitRatio

45,000
= x100
3,00,000
=15%

Illustration:20
Fromthefollowingdata,calculatethefixedassetturnoverratio.

Rs.
Cashsales

1,00,000

Creditsales

1,20,000

SalesReturns

20,000

Fixedassets

45,000

Depreciation

5,000
196

197

Solution:
Sales
FixedAssetTurnoverRatio =

FixedAssets
Sales

= Cashsales+Creditsales
SalesReturns
=1,00,000+1,20,00020,000
= 2,20,00020,000
= Rs.2,00,000

FixedAssets

= FixedAssetsDepreciation
= 45,0005,000
= Rs.40,000

2,00,000
FixedAssetTurnoverRatio = =5Times
40,000
Illustration:21
Fromthefollowingtradingaccount,calculatestock
turnoverratioandgrossprofitratio.
TradingAccountofMohammedAli&
Co.fortheyearended31.3.2004
Particulars
ToOpeningstock
ToPurchases
ToCarriage
ToGrossprofit

Rs.
40,000
1,20,000
10,000
50,000

Particulars

Rs.

BySales
ByClosingstock

2,00,000
20,000

2,20,000

Solution:
CostofGoodsSold
StockTurnoverRatio =

2,20,000

AverageStock
CostofGoodsSold

= SalesGrossProfit
= 2,00,00050,000
= Rs.1,50,000

AverageStock

OpeningStock+ClosingStock
=
2
40,000+20,000
=
2
= Rs.30,000

1,50,000
StockTurnoverRatio = =5Times
30,000
GrossProfitRatio

GrossProfit
= x100
NetSales
50,000
1=

x 100

2,00,000

2= 25%
198

Illustration:22
Fromthe
followingfigures

199

calculate
creditors
turnoverratio

C
r

Creditpurchases

Billspayable

Creditors

Solution:

t
o

CreditorsTurnoverRatio=

r
s

Average
accounts
payable=Bills
payable+
Creditors

1
,
8
0
,
0
0
0

T
u
r
n
o

1= 50,
000
+
40,
000

2=Rs.
90,0
00

e
r

R
t
i
o

ToGrossprofit

T
i
m
e
s

90,000
Illustration:23
Thefollowingis
theTrading&Profit
andLossAccountof
afirmfortheyear
ended31.3.04.
TradingandProfit
andLoss
Account
ofLilly
&Co.
forthe
year
ended
31.3.200
3
Particulars
ToOpeningstock
ToPurchases
ToWages

Rs.
35,000
2,25,000
10,000

1,80,000
4,50,000
200

ToAdministrationexpenses
10,000
ToInterest
5,000
ToLossonsaleof
machinery
2,000
ToSellingexpenses
10,000
ToNetProfit
1,55,000

10
0

Sales
1,80,000
1=

1,82,000

Calculate
profitability
ratios.

Solution:

G
ros
s
Pro
fit
1.
Gr
oss
Pro
fit
Rat
io
=

x
10
0
4,
00
,0
00

2=45%
N
et
Pr
of
it
2.
N
et

4,

Pr
of
it
R
at
io
=

x
1
0
0

00
,0
00

2=38.7
5%
O

Sales
1,55,000
1=

x
1
0
0

perat
ing
Profi
t3.
Oper
ating
Profi
t
Rati
o=

x
100

Sales
201

OperatingProfit

= NetProfit+Nonoperating
expensesNonoperatingincome
=NetProfit+Interest+Lossonsale
ofmachineryDividend
=1,55,000+2,000+5,0002,000
= Rs.1,60,000

1,60,000
OperatingProfitRatio = x100
4,00,000
= 40%

4.OperatingRatio
Costofgoodssold

Costofgoods+
OperatingExpenses
=
Sales
= SalesGrossProfit
= 4,00,0001,80,000
= Rs.2,20,000

OperatingExpenses

= Administration+SellingExpenses
= 10,000+10,000
= Rs.20,000

OperatingRatio

2,20,000+20,000
= x100
4,00,000
=60%*

*Note:Operatingratio=100%Operatingprofitratio
1=100%40%
2=60%
Illustration:24
Fromthegivendata,calculate
1. GrossProfitRatio
2. NetProfitRatioand
3. CurrentRatio
Sales
NetProfit
Currentliabilities

Rs.
3,00,000
30,000
30,000

Costofgoodssold
CurrentAssets

Rs.
2,00,000
60,000

Solution:
i)

Grossprofitratio

GrossProfit
= x100
Sales

GrossProfit

= SalesCostofGoodssold
= 3,00,0002,00,000
= Rs.1,00,000

ii)

GrossProfitRatio

1,00,000
= x100=33.33%
3,00,000

NetProfitRatio

NetProfit
= x100
Sales
202

203

30,000
= x
100

3,00,000
=10%
CurrentAssets
iii)
Current
Ratio

Current
Liabilities

rofit
Ratio
2. Net
Profit
Ratio
3. Stock
Turn
over
Ratio
4. Debt
ors
Turn
over
Ratio

60,000
= =
2:1

30,000

Sales
CostofGoodsSold

Illustration:
25
From
the
followin
gdetails
calculat
e
1. G
ro
ss
P

OpeningStock
ClosingStock
Debtors

AdministrationExpenses

Solution:

1) GrossProfitRatio
GrossProfit

GrossProfit
= x100
Sales
= SalesCostofgoodssold
= 1,50,0001,20,000
= Rs.30,000

GrossProfitRatio

2) NetProfitRatio
NetProfit

30,000
= x100=20%
1,50,000
NetProfit
= x100
Sales
= GrossProfitAdministration
Expenses
= 30,00015,000
= Rs.15,000
15,000
= x100
1,50,000
= 10%

3) StockTurnoverRatio

CostofGoodsSold
=
AverageStock
204

205

peningStock+
ClosingStock

AverageStock
=

m
e

29
,000+
31,000
=

=
Rs.
30,000
1,20,000
=

0
,
0
0
0

CreditSales
4)
Debtors
TurnoverRatio=

Average
Accounts
Receivable

1,50,000


1
0

T
i
m
e
s

1
5
,
0
0
0

Illustration:26
Fromthe
BalanceSheetgiven
below,calculate
CurrentRatio&
ProprietoryRatio.
BalanceSheet
ofRam&Co.
Ltd.ason
31.3.2004
Liabilities

Rs.

ShareCapital
Reserves
Bankoverdraft
Currentliabilities

60,000 F
45,000 C
70,000 In
1,20,000 P
G
2,95,000

Solution:
1.

Currentratio

=1,6
=

= Rs

ProprietoryRatio
=
= 0.625:1
2)

ProprietoryRatio

Shareholdersfunds

=
=
=

TangibleAssets

= 0.
Illustration:27

Surya Ltd.
provides

the
followinginformation
ShareCapital+Reserves
for the year ending
31.3.05. Calculate
60,000+45,000
Gross Profit ratio,
Rs.1,05,000
Net profit ratio,
Operatingprofitratio
FixedAssets+CurrentAssets
andOperatingratio.
+Investments

206

1,
=
2,

207

Rs.
Sales
OfficeExpenses
Financeexpenses
Interestreceived

Rs.

2,00,000
6,000
3,000
500

GrossProfit
SellingExpenses
Lossonsaleofplant
NetProfit

80,000
4,000
400
67,100

Solution:
1)

GrossProfitratio

GrossProfit
= x100
Sales
80,000
= x100
2,00,000
=40%

2)

NetProfitratio

NetProfit
= x100
Sales
67,100
= x100
2,00,000
= 33.55%

3)

OperatingProfitRatio
Operatingprofit

OperatingProfit
=
Sales
= NetProfit+Nonoperating
expensesNonoperatingIncome
= NetProfit+Lossonsaleof
plant+Financialexpenses
Interestreceived

=67,100+400+3,000500
= Rs.70,000
70,000
= x100
2,00,000
=35%

4)OperatingRatio
Costofgoodssold

Costofgoodssold+
Operatingexpenses
=
Sales
= SalesGrossProfit
= 2,00,00080000
= Rs.1,20,000

Operatingexpenses

= Officeexpenses+Sellingexpenses
= 6,000+4,000
= Rs.10,000
10,000+1,20,000
= x100
2,00,000
1,30,000
1= x100
2,00,000

2=65%
208

Illustration:28

209

Fromthe
followingProfitand

LossAccountofa
company,ascertain
thefollowingratios.

ss
Pr
of
it
1. Gross Profit
1)
Ratio
G
2. Net Profit
ro
Ratio
ss
3. Operating
Pr
Ratio
of
4. Operating
it
ProfitRatio
ra
5. Stock
ti
Turnover
o
Ratio
=

TradingandProfit&LossAccountfor

theyearending31.3.2005
Dr

Particulars
Rs.

ToOpeningStock
10,000

ToPurchase
44,000
x
ToGrossProfit
20,100
1
66,000
0
ToAdministration
0
expenses
2,000
ToSellingexpenses
ToInterest
ToNetProfit

8,900
3,000
8,000
21,900

Solution:
G
ro

Sales
20,100
=

x
10
0
=
35
.8
9
%
56
,0
00

2) NetProfitratio

NetProfit
= x100
Sales
8000
= x100
56000
= 14.29%

OperatingProfit
3) OperatingProfitRatio = x100
Sales
OperatingProfit

= NetProfit+Nonoperating
ExpensesNonOperatingIncome
=NetProfit+InterestProfiton
saleofinvestments+dividend
=8,000+3,000(1000+800)
= 11,0001,800
= Rs.9,200

9,200
OperatingProfitRatio = x100
56,000
= 16.43%

4) OperatingRatio

Costofgoodssold
+OperatingExpenses
= x100
Sales
210

211

GrossProfit

= SalesCostofgoodssold
= 56,00020,100
= Rs.35,900

Operatingexpenses

= AdministrationExpenses
+SellingExpenses
= 2,000+8,900
= Rs.10,900
35,900+10,900
= x100
56,000

OperatingRatio

5.StockTurnoverRatio

AverageStock

46,800
= x100=83.57%
56,000
CostofGoodsSold
=
AverageStock
OpeningStock+ClosingStock
=
2
10,000+10,000
=
2
= Rs.10,000

StockTurnoverRatio

35,900
= =3.59times
10,000

Illustration:29
CalculateDebtorsturnoverratiofromthefollowing.
TotalSales
10,000 CashSales
2,000
OpeningDebtors
1,000 ClosingDebtors
1,500
OpeningBillsReceivable
750 ClosingBillsReceivable 1,250
Solution:
DebtorTurnoverRatio

CreditSales
=
AverageAccountsReceivable

CreditSales

= TotalSalesCashSales
= 10,0002,000
= Rs.8,000

AverageAccounts
Receivable

Opening(Debtors+Bills
receivables)+Closing(Debtors+
Billsreceivables)
=
2
(1,000+750)+(1,500+1,250)
=
2
1,750+2,750
=
2
4,500
1= =
Rs.2,2502
2=Rs.2,250

8,000Debtors
TurnoverRatio==3.56times.
2,250

212

Table
showing
summaryof
Accounting
Ratios
S.No

Description
oftheRatio

6.

Formula

1.

Currentratio

Currentassets
Currentliabilities

2.

LiquidRatio

Liquidassets
Currentliabilities

3.

Absolute
LiquidRatio

AbsoluteLiquid
assets
Liquidliabilities

4.

DebtEquity

5.

213

LongTerm
Debts

Ratio

Shareholdersfunds

Proprietory
Ratio

Shareholdersfunds
Totaltangibleassets

GrossProfit
Ratio

Grossprofit
x1
Sales

S.No

Descriptionof
theRatio

Formula

Notes
Netsales=Totalsales(cash&
credit)Salesreturns

7.

NetProfitRatio

Netprofit
x100
Sales

Netprofit=Grossprofit
(Administration,Sellingand
distributionand
financial
expensesexpenses)

Operating
profit
x100
Sales

Operatingprofit=Netprofit+
NonoperatingexpensesNon
operatingincome [OR]
Gross profit Operating

8.

Operating
ProfitRatio

expenses
9. OperatingRatio

Costofgoods
sold+Operating
expenses
x100
Sales

10.

Capital
TurnoverRatio

Sales
Capital
Employed

11.

FixedAssets
TurnoverRatio

Sales
FixedAssets

Fixedassets=Fixedassets
Depreciation

12.

StockTurnover
Ratio

Costofgoods
sold
Averagestock

Averagestock=openingstock
+closingstockdividedbytwo.

Debtors
TurnoverRatio

CreditSales
Average
accounts
receivable
(Debtors+Bills
receivable)

Averageaccountsreceivableis
calculatedby
dividingthe
openingbalanceofdebtorsand
billsreceivableandclosing
balanceofdebtorsandbills
receivablebytwo.

13.

214

Capitalemployed=Equityshare
capital
+Preferenceshare
capital+reservesandsurplus+
longtermborrowedfunds

215

S.No Descriptionof

Formula

theRatio
14.

items expressed
in quantitative
form.

Creditors
CreditPurchases
TurnoverRatio Averageaccounts
payable
(Creditors+Bills
payable)

Q
U
E
S
T
I
O
N
S
I.Objective Type:

2.

Ratio helps in
_______
forecasting.

3.

_______ Ratio
measures the firm
abilitytopayoffits
currentdues.

4.

_______arethose
assets which are
easily convertible
intocash.

5.

Bankoverdraftis
an example of
_______
liability.

6.

Liquid ratio is
used to assess
the

firms
_______
liquidity.

7.

Liquid assets
means current
assets

less
_______ and
_______.

8.

_______ ratio is
modifiedformof
liquidratio.

a)Fillintheblanks:
1.

_______ is a
mathematical
relationship
between two

9.

Liquid liabilities
means current
liabilities less
_______.

10. Proprietory ratio

shows

the
relathionship
between
_______ and
total tangible
assets.

11. Gross profit can

beascertainedby
deductingcostof
goods sold from
_______.
12. Stock turnover
ratioisotherwise
called

as
_______.
13. 100%

Operating profit
ratio is equal to
_______ratio.
14. Whentotalsales
is Rs.2,00,000,
cash sales is
Rs.65,000, then
credit sales will
beRs._______.
15. Liquid ratio is
otherwiseknown
as_______.
(Answer:1.Ratio;2.
Financial;
3. Liquid;
4. Current
Assets; 5.
Current;6.
Short
term; 7.
Stock,

prepaid
expenses;
8.
Absolute
liquid; 9.
Bank
overdraft;
10.
Sharehold
ers fund /
Proprietor
sfund;11.
Sales; 12.
Inventory
turnover
ratio; 13.
Operating
ratio; 14.
Rs.1,35,00
0; 15.
Quick
ratio(Acid
testratio))
b)Choosethe
correctanswer:
1.

All solvency
ratios

are
expressed in
termsof
a)Proportion
b)Times
c)Percentage

2.

Allactivityratios
are expressed in
termsof
a)Proportion
b)Times
c)Percentage

3.

All profitability
ratios

are
expressed in
termsof
a)Proportion
b)Times
c)Percentage

4.

Liquid liabilities
means
a)Current
liabilities b)
Currentliabilities
Bankoverdraft

3)Current
liabilities +
Bankoverdraft
5.

Shareholders
fundsincludes
1) Equityshare
capital,
Preference
share
capital,
Reserves &
Surplus
2) Loans from
banks and

3)

financial
institutions
Equity share
capital,
Preference
sharecapital,
217

216

6.

Which of the
following option
iscorrect
1) Tangible
Assets =
Land +
Building +
Furniture
2) Tangible
Assets =
Land +
Building +
Goodwill
3)

7.

Reserves &
Surplus and
Loans from
banks and
financial
institutions

2)

3)

8.

Tabgible
Assets=Land
+ Furniture +
Goodwill +
Copyright

Grossprofitratio
establishes the
relationship
between
1) Gross profit
& Total
sales

9.

Gross profit
& Credit
sales
Gross profit
& Cash
sales

Openingstockis
equal

to
Rs.10,000,
Purchase
Rs.2,00,000 and
closing stock is
Rs.5,000.Costof
goods sold is
equalto
a) Rs.2,15,000
b)Rs.2,10,000
3) Rs.2,05,000
Operatingratiois
equalto
1) 100
Operating
profitratio
2) 100 +

3)

Operating
profitratio
Operating
profitratio

10. Total sales is

Rs,3,40,000 and
the gross profit
made

is
Rs.1,40,000.The
cost of goods
sold will be
________
a)Rs.2,00,000
b)Rs.
4,80,000 c)Rs.
3,40,000
11. Total sales of a
business concern
isRs.8,75,000.If
cash sales is
Rs.3,75,000,
then credit sales
willbe
a)Rs.12,50,000
b)Rs.5,00,000
c)12,00,000
12. Cost of goods
sold

is
Rs.4,00,000 and
average stock is
Rs.80,000.Stock
turnover ratio

willbe
a)5times b)4
times
c)7
times

13. Currentassetsof
a business
concern is
Rs.60,000 and
current liabilities
are
Rs.30,000.Curre
ntratiowillbe
a)1:2 b)1:1
c)2:1

14. Equity share

capital

is
Rs.2,00,000,
Reserves &
surplus

is
Rs.30,000.
Debenture
Rs.40,000 and
the shareholders
fundswillbe
a)Rs.2,00,000
b)Rs.
2,30,000 c)Rs.
1,90,000
(Answers:1.(a);2.(b);
3.(c);4.(b);5.(a);6.
(a);7.(a);8.(c);9.(a);

10. (a);11.
(b);
12.(a);
13.(c);
14.
(b))

3.
4.

5.

6.

7.
8.
9.
10.

35. Other
Questions :

1.

2.

What are the

siginificance of
financial
statement
analysis?
What are the
limitations of

11.
12.
13.

14.

financial
statement
analysis?
Explain current
ratio.
Whatistheneed
for calculating
Debt Equity
ratio?
What

are
profitability
ratios?
What

are
operating
expenses?
Write notes on
operatingratio.
Whatareactivity
ratios?
What is debtors
turnoverratio?
Whatisaccounts
receivable?
What is account
payable?
Explainsolvency
ratios.
Write notes on
capital turnover
ratio.
Whatarecurrent

assets?
15. Write notes on
netprofitratio.
III.Problems:

1.

From

the
following,
calculate the
currentratio.

Cashinhand
Sundrydebtors
Stock

218

Rs.
2,00,000
80,000
1,20,000
219

Sundrycreditors
Billspayable

1,50,000
50,000
(Answer:2:1)

2.Calculateliquidratio

Rs.
Currentassets
20,000
Stock
3,000
Prepaidexpenses
1,000
Currentliabilities
8,000
(Answer:2:1)
3. Fromthefollowinginformation,calculatecurrentratioand
liquidratio
Rs.
Rs.
Cash
5,000 Debtors
29,000
Billsreceivable
5,000 Shortterminvestment 15,000
Stock
52,000 Prepaidexpenses
2,000
Creditors
36,000 Billspayable
10,000
Outstandingexpenses
8,000
(Answer:Currentratio2:1;Liquidratio1:1)
4.Fromthefollowing,calculateCurrentratio&Liquidratio
BalanceSheetofGopiCo.Ltd.,ason31.3.05
Liabilities

Assets

Rs

ShareCapital

6,300 FixedAssets

5,100

Reserves

1,200 Stock

2,100

Bankoverdraft
Creditors

5.

Rs.

600 Debtors

960

1,800 Cash

1,740

9,900

9,900

(Answer:Currentratio2:1;Liquidratio1.13:1)
Fromthefollowing,youarerequiredtocalculateliquidityratios.

Debtors
Cashinhand
CashatBank
ShortTermInvestments
Prepaidexpenses

5,000
4,000
6,000
2,000
1,000

Creditors
Billspayable
Outstandingexpenses
Billsreceivable
Closingstock

4,000
3,000
250
3,000
8,000

(Answer:CurrentRatio4:1;LiquidRatio2.76:1;
AbsoluteRatio1.66:1)

6.

From the following information, calculate current ratio,

liquidratio&Absoluteliquidratio.

Cash
Debtors
Stock

1,800
14,200
18,000

BillsPayable

Creditors
Outstandingexpenses
Bankoverdraft

5,000
1,500
7,500

2,700

(Answer:Currentratio2.04:1;Liquidratio0.96:1;Absolute
liquidratio0.196:1)

7.

CalculateDebtEquityratio

8.

Rs.
2,00,000
1,50,000
50,000
1,00,000
(Answer:0.43:1)
Fromthefollowing,CalculateGrossProfitRatio
Equitysharecapital
GeneralReserve
Longtermloan
Debentures

Rs.
GrossProfit
Sales
SalesReturn
220

50,000
5,50,000
50,000
(Answer:10%)
221

9.

Calculate Gross
Profitratio

Grossprofit
Sales

Sales
CostofGoodssold
SalesReturn
10.CalculateCapitalturnoverratio
Rs.
Sales
10,20,000
EquityShareCapital
1,00,000
PreferenceShareCapital50,000

(Answer:5Times)
11.Fromthefollowing
data,calculatethe
FixedAssetTurnover
ratio

FixedAssets
Depreciation
TotalSales
SalesReturns
12.CalculateNetProfitRatio
NetProfit
Sales
SalesReturn
13.CalculateOperatingprofitratio
Rs.

1,00,000 O
6,02,000 S

(Answer:10%

14.CalculateFixedAssetsTurnoverRatio
Rs.
1,00,000
25,000
3,00,000
(Answer:4times)

Fixedasset
Depreciation
Sales
15.CalculateFixedAssetsTurnoverRatio
FixedAssets
Sales

Rs.
1,50,000
4,50,000
(Answer:3times)

16.Fromthefollowing,determinethestockturnoverratio
Rs.
OpeningStock
40,000
Closingstock
30,000
Purchases
95,000
(Answer:3times)
17.CalculateStockturnoverratio
Rs.
15,000
25,000
60,000
(Answer:2.5times)

OpeningStock
ClosingStock
Purchases
18.ComputeDebtorsturnoverratio
TotalSales
SalesReturn
OpeningDebtors
ClosingDebtors
222

Rs.
7,50,000
50,000
1,17,000
83,000
(Answer:7times)

223

19.Fromthe
following,determine
DebtorsTurnover
ratio
TotalSales
SalesReturn
ClosingDebtors

Rs.
1,75,000
10,000
12,000

ToAdministration
expenses
ToSellingexpenses
ToFinanceexpenses
ToLossonsaleoffurniture
ToNetProfit

(Answer:Gross
Profitratio
32.5.%;Net
20.Calculatecreditorsturnoverfromthefollowinginformation
Profitratio
Rs.
17.44%;
TotalPurchases
85,000
Operating
PurchasesReturn
5,000
Profitratio
ClosingCreditors
15,000
20%;
Operating
21. From

the
costratio
Trading&Profit
80%)
& Loss Account
of Fashion
World Ltd.,
ascertain the
profitability
ratios.

TradingandProfit&LossAccount
fortheyearending31.3.04

Dr.
Particulars

ToOpeningStock
ToPurchases
ToGrossProfit
(transferredtoprofit&
lossA/c)

Rs.
20,000
1,20,000
52,000

1,92,000

B
12,000 B
8,000
4,000
500
27,900
52,400

22.Fromthe
following,calculate
Profitabilityratios.
Dr.

creditors turnover,
Capitalturnover&
Fixed

asset
turnoverratio.

Trading&ProfitandLossofAmbika&Co.
fortheyearending31.3.2004
Particulars

ToOpeningStock
ToPurchase
ToGrossProfit

Rs.
1,99,000
11,19,000
6,80,000
19,98,000

ToAdministrationexpenses 3,00,000
ToSellingexpenses
60,000
ToFinancialexpenses
30,000
ToLossonsaleof Plant
8,000
ToNetProfit
3,00,000
6,98,000

(Answer:Gross
Profitratio
40%;Net
Profitratio
17.65%;
Operating
Profitratio
18.82%;
Operating
ratio
81.18%)

23. From

the
following Balance
sheet, calculate
Debtors turnover,

Bal
anc
e
She
et
as
on
31.
3.0
4

Liabilities
ShareCapital
Reserves
Creditors
6%Debentures

Rs.
4,00,000
2,40,000
2,60,000
60,000

Assets
Land&Building
Plant&Machinery
Stock
Debtors
Cash

9,60,000

Rs.
3,00,000
1,60,000
2,96,000
1,42,000
62,000
9,60,000

AdditionalInformation:
CreditPurchasesduringtheyearRs.10,40,000
CreditSalesduringtheyear
Rs.4,26,000
224

(Answer:Debtors
turnoverratio3
times;Creditors
turnoverratio4
times;Capital
turnoverratio
0.61times,Fixed
assetturnover
ratio0.93times)
24. From

the
following,
calculate
Operating profit
ratio

and
Operating ratio,
Grossprofitratio
and Net profit
ratio.
Sales
Grossprofit

225

Administrationexpenses
Sellingexpense
Lossonsaleof
investments800
(Answer:Gross
profitratio
30%:Netprofit
ratio26.6%;
Operatin
gprofit
ratio
27%;
Operatin
gratio
73%)

1,00,000
30,000

25. From

the
following
Balancesheetof
Mumthaj
Industries Ltd.,
you required to

1,000
2,000

calculate Debt
Equity ratio,
Proprietaryratio,
Current ratio,
Fixed assets
turnoverratio.

ratio4times)

26. From

the
following
Balance sheet
calculate 1.
Current ratio, 2.
Liquid ratio, 3.
DebtEquity
ratio & 4.
Proprietoryratio

Bala
nce
She
etas
on
31.0
3.05
Liabilities
ShareCapital
GeneralReserve
Debentures
Currentliabilities

Rs.
1,00,000
20,000
30,000
50,000
2,00,000

Additional
information:Credit
salesduringtheyear
wasRs.4,80,000.

(Answer:Debt
Equityratio0.25:1;
Proprietoryratio
0.6:1;
Currentratio
1.6:1;Fixed
assetturnover

Balance
Sheetof
JasmineLtd.
ason
31.03.2004
Liabilities
ShareCapital
Reserves
Loans
Creditors
Bankoverdraft

Ba
lan
ce
she
et
Rs.
20,000
10,000
16,000
10,000
4,000
60,000

(Answer:Currentratio1.43:1;Liquidratio
0.86:1;DebtEquity
ratio0.53:1;
Proprietoryratio
0.625:1)

Liabilities
EquityShareCapital
Preferenceshare
capital
GeneralReserve
Debentures
Billspayable
Bankoverdraft
Creditors
Outstandingexpenses

55,000 L
P
15,000 F
25,000 S
35,000 B
3,000 D
3,000 S
8,000 P
6,000 C
1,50,000

Additionalinformation:
CreditsalesRs.1,65,000

(Answer:Current
ratio5.25:1;
Liquidratio
2.85:1;Absolute
liquidratio
1.41:1;Debtors
turnoverratio5
times;Creditors
turnoverratio4
times)

27. Calculate Current

Ratio,Liquidratio,
Absolute liquid
ratio, Debtors
turnover and
Creditors turnover
ratio from the
followingBalance

Sheet
226

Rs.

227

28. ThefollowingisthesummarisedTradingandProfitandLoss
A/c,fortheyearendingandtheBalanceSheetasatthatdate:
Dr.

TradingandProfitandLossAccount
fortheyearending31.3.2005

Particulars
OpeningStock
ToPurchases
ToDirectexpenses
ToGrossProfitc/d
ToAdministrative
expenses
ToInterest
ToSellingexpenses
ToNetProfit

Rs.
Particulars
10,000 BySales
50,000 ByClosingstock
5,000
50,000
1,15,000
ByGrossProfitb/d
15,000
3,000
12,000
20,000
50,000

Cr.

Rs.
1,00,000
15,000
1,15,000
50,000

50,000

BalanceSheetason31.3.2005
Liabilities
Capital
Currentliabilities
ProfitandLossA/c

Rs.
Assets
Rs.
1,00,000 LandandBuilding
50,000
40,000 PlantandMachinery
30,000
20,000 Furniture
20,000
Stock
15,000
Sundrydebtors
15,000
Billsreceivable
12,500
Cashinhand&atbank
17,500
1,60,000
1,60,000

Fromtheabove,calculate
(1)GrossProfitRatio,(ii)CurrentRatio,(iii)AcidTestRatio,
(4) StockTurnoverRatio,(v)FixedAssetsTurnoverRatio.
(Answer:GrossProfitRatio50%;CurrentRatio1.5:1;
AcidTestRatio1.125:1;StockTurnoverRatio4times;
FixedAssetsTurnoverRatio1time)

228

Chapter - 5

CASH BUDGET
Learning Objectives
AfterstudyingthisChapter,youwillbeableto

1 understand the meaning, definition, characteristics and

advantagesofCashbudget.

2 preparecashbudgetusingreceiptsandpaymentsmethod.

CashBudgetisacomponentoftwowordscashandbudget.The
termcashherestandsforcashandbankbalance.Budgetmeans,in
simplewords,anestimaterelatingtofutureactivitiesofanorganisation.

5.1 Budget:
Budget is a blue print of future course of action and
activities.Budgetmeansexpressingthefuturecourseofaction
ofanorganisationinquantitativeterms.
LongmansDictionaryofBusinessEnglishdefinesabudget
asanaccountoftheprobablefutureincomeandexpenditure.
According to the Institute of Cost and Management
Accountants, London, Budget is a financial and/or quantitative
statement,preparedandapprovedpriortoadefinedperiodoftime,of

229

thepolicytobe
pursuedduringthat
periodforthe
purposeofattaininga
givenobjective.
5.1.1
Characteristics:

Budgethasthe
following
important
characteristics
1. It

is
prepared in
advanceand
relates to a
future
period.
2. It

is
expressedin
terms of
money
and/or
physical
units.
3. Itisamean
to achieve
the planned
objective.
In business, the

different kinds of
budgets are prepared
to facilitate different
aspects of the
business concern.
Suchaspectsrelateto
sales, purchases,
production,
overheads as well as
financing of the
business. One of the
main

budgets
prepared by a
business concern is
CashBudget.
5.2 Cash Budget:
Cash budget is
one of the most
important budgets
prepared by a
business concern as
every transaction
directly or indirectly
dealswithcash.Cash
budget shows the
estimate of cash
receipts and cash
payments from all
sources over a
specific period. This

is also called as
FinanceBudget.
5.2.1 Advantages :
1.

2.

It helps in
maintaining
an adequate
cash
balance.
Itprovidesthe
following
useful
information to
the
management

1. to

determi
ne the
future
cash
needsof
a
business
concern

2. to plan
for
financi
ng
those
needs
and
3. to have
control

over
cash
balance
of the
busines
s
concern
.
Thus,inshortcash
budgetisanuseful
toolforfinancial
planning.

5.2.2 Preparation of
cash budget
Methods

Therearethree
methodsbywhicha
cashbudgetis
prepared.Theyare
1. Receipts and
Payments
Method
2. Adjusted
Profit and
LossAccount
Method or
Cash Flow
Method
3. Balance
Sheet
Method
However,
amongthethree
methodsonly
Receiptsand
PaymentsMethod
aloneisdiscussedin
thischapter.
Receipts and
Payments Method

Under this
method Cash budget

projectstheconcerns
cash receipts and
payments for a
certainperiod(budget
period). It has two
basiccomponents:
1. Estimate of
cash receipts
and
2. Estimate of
cash
payments
CashReceipts
1
include:
2

3
4

Cashsales
Cash
receivable
fromcustomers
Businessreceipts
like
interest,
commission,
dividendetc
Saleofassets
Proceeds
issue
from
of
shares/debenture
s

6 Loansborrowed
CashPayments
1
include:

Cash
purchases

Cash payable to
suppliers

3 Business

expenses like
wages, office
expenses,
selling
expenses,etc.

1
2
3

Payme
ntofinterest,
income
tax,
dividendetc.
Purchase
assets

of

Redemption
of
shares/debenture
s

4 Repayment
loans

of

Steps in the
preparation of cash
budget

Step1Take
openingcash
balance

230

231

balance
Format:

Cash
Budgetfor
theperiod

Particulars
OpeningCashBalance
Add:Estimatedcashreceipts:

Step2Addthe
estimatedtotal
cashreceiptsfor
themonth

Cashsales

Step3
Calculatethe
totalcash
availableforthe
month

Saleofassets

Step4Lessthe
estimatedtotal
cashpayments
duringthemonth

Step5
Calculatethe
closingcash

Cashreceivablefromcustomers
BusinessreceiptslikeInterest,
commission,dividendetc
Loansborrowed

Proceedsfromissueofshares/debent
Totalcashavailableduringthemonth

p
e
n
s
e
s
,

s
e
l
l
i
n
g

e
x
p
e
n
s
e
s
,

e
t
c

Less:Estimatedcash
payments:
Cashpurchases
Payabletosuppliers
Bus
i
n
e
s
s

e
x
p
e
n
s
e
s

w
a
g
e
s
,

o
f
f
i
c
e

e
x

Bu
s
i
n
e
s
s

P
a

y
m
e
n
t
s

I
n
t
e
r
e
s
t

p
a
i
d
,

i
n
c
o
m
e

t
a
x
,

d
i
v
i
d

e
n
d

e
t
c
.
Purchaseofassets
Repaymentofloans
Redemptionof
shares/debentures
Totalcashpayments
duringthemonth
Closingcashbalance

Theclosingcash
balanceofthecurrent
monthwillbethe
openingcashbalance
ofthenextmonth.
Illustration:1
Fromthefollowing
information,
preparecash
budgetforJune
2005.

Particulars

Rs.

Cashinhand1.6.2005

10,000

CashpurchasesforJune,2005

70,000

CashsalesforJune,2005

1,00,000

InterestpayableinJune,2005

1,000

PurchaseofOfficefurnitureinJune,2005

2,500

232

233

Closingcashbalance

Solution:
Cash
Budget
forthe
month
June,
2005

Illustration:2

Prepareacash
budgetforthemonths
ofJune,July,August
2004fromthe
following
Particulars
information:
Openingcashbalance
1) Opening
cashbalance
Add:Estimatedreceipts:
in June
CashSales
Rs.7,000.
Totalcashavailableduringthemonth 2) Cash sales
for June
Less:Estimatedcashpayments:
Rs.20,000;
July
Cashpurchases
Rs.30,000
Interestpaid
and August
Purchaseoffurniture
Rs.40,000.
3) Wages
Totalcashpayments

4)

5)

6)

payable
Rs.6,000
every
month.
Interest
receivable
Rs.500 in
the month
ofAugust.
Purchase of
furniturefor
Rs.16,000in
July.
Cash
Purchases
for June
Rs.10,000;
July
Rs.9,000
and August
Rs.14,000.

Solution:
CashBudget
forthe
periodJune
toAugust
2004
Particulars
Openingcashbalance
Add:Estimatedcashreceipts:
Cashsales
Interest
Totalcashavailableduringthemonth
Less:Estimatedcashpayments:
Cashpurchases
Paymentofwages
Purchaseoffurniture
Totalcashpaymentsduringthemonth
Closingcashbalance

Note : The closing

cash
balance in
Junewillbe
the opening
cash
balance in
July.

balance in
October
Rs.3000.

Illustration:3
From

the
following
information, prepare
a budget for three
monthsfromOctober
2003.
1)

3)

4)

Opening
cash
Credit
purchases
September
Rs.10,000;
October
Rs.12,000;
November
Rs.14,000;
December
Rs.16,000.
The period
of credit
allowed by
suppliers is
onemonth.

Dividend to
be received
in
December
Rs.4,000.

2)

234

Cash Sales
October:
Rs.25,000;
November :
Rs.20,000;
December :
Rs.15,000.

235

5)

Advancetax
Rs.3,000
payable in
October.

6)

Sale of an
oldassetfor
Rs.12,000
during
November.

Solution:
CashBudgetfor
theperiod
Octoberto
December2003
Particulars
Openingcashbalance

Add:Estimatedcashreceipts:
Cashsales
Dividend
Saleofasset
Totalcashavailableduringthemonth
Less:Estimatedcashpayments:
Paymenttosuppliers
Advanceincometaxpayable
Totalcashpaymentsduringthemonth
Closingcashbalance

Note: The suppliers

of goods have given
one month credit, so
thepurchasesmadein
September will be
paid in October and
those purchases in
October will be paid
in November, those
purchases

in
November will be
paidinDecember.

Illustration:4
Fromthe
following
information,prepare
acashbudgetfor
April,MayandJune
2005.
Month

CreditSales
Rs.

Cred

February
March
April
May

45,000
55,000
60,000
60,000

3
2
2
4

June

65,000

1)

2)

3)

4)

Opening
cash
balance
Rs.5000.
Credit
allowed by
suppliers is
twomonths.
Credit
allowed to
customersis
onemonth.
Office
expenses
are payable
in the same

5)

6)

month
Dividend
Rs.1000 is
receivable
inApril.
Interest
payable in
May
Rs.1,800.

Solution:
CashBudget
forthe
periodApril
toJune,
2005

April
Rs.

Particulars
Openingcashbalance

May
Rs.

June
Rs.

5,000

24,000

48,200

Add:Estimatedcashreceipts:
Cashreceivablefromcustomers
Dividend

55,000
1,000

60,000

60,000

Totalcashavailableduringthemonth

61000

84,000

1,08,200

236
Less:Estimatedcashpayments:
Paymentstosuppliers
Officeexpenses
Interestpayable
Totalcashpaymentsduringthemonth
Closingcashbalance

237
March

84,000

33,000

April

78,000

35,000

May

56,000

39,000

Additional
information:
1)

Illustration:5
Prepareacash
budgetforthe
monthsMarch,
AprilandMay2005
fromthefollowing
information

2)

3)

Credit
Sales
Rs.

Credit
Purchase
Rs.

January

60,000

36,000

February

82,000

38,000

Month

4)

Opening
cash
balance
Rs.8,000.
Period of
credit
allowed to
customers
onemonth
Period of
credit
allowed by
suppliers
twomonths.
Wages and
miscellaneo

5)

us expenses
are payable
in thesame
month.
Lag in
payment of
office
expenses is
onemonth

Solution:
CashBudgetfor
theperiod
March,April&
May2005
Particulars
Openingcashbalance
Add:Estimatedcashreceipts:
Cashreceivablefromcustomers
Totalcashavailableduringthemonth
Less:Estimatedcashpayments:
Paymentstosuppliers
Wages
Officeexpenses
Miscellaneousexpenses
Totalcashpaymentsduringthemonth
Closingcashbalance

Notes:
1.

Theclosingcash
balanceinMarch
will be the
opening balance
in April and so
on.

2.

Since credit
allowed to

customersisone
month, the
amountofcredit
salesinFebruary
is collected in
March and so
on.
3.

purchases of
January is paid
inMarchandso
on.
4.

Since credit
allowed by
suppliers is two
months credit
238

Q
U
E
S
T
I
O
N
S
I.Objective Type:
a)Fillintheblanks:
1.

The term cash

in cash budget
stands

for
__________and

Office expenses
are paid in the
next month, so
office expenses
forFebruarywill
bepaidinMarch
andsoon.
239

__________.

2.

Cash budget is
also called as
__________.

3.

There

are
__________
methods by
which a cash
budget

is
prepared.

4.

The opening
balanceofcashin
April is Rs.1250.
Total receipts for
the month are
Rs.4300 and total
payments
amounted to
Rs.3750. Opening

balanceofcashin
May will be
__________

5.

Cashbudgetisa
useful tool for
__________.

6.

The closing
balance of one
month will be
the __________
balance of the
nextmonth.

(Answers:1.Cash
balance,Bank
balance;2.Finance
Budget;
3. Three;
4.
Rs.1,800
; 5.
Financia
l
Planning
; 6.
opening)
2) Choose

the
correctanswer:
1.

Budget is an
estimate relating
to __________
period.

a)future b)
current c)past
2.

Budget

is
expressed in
termsof
a)Money b)
Physicalunits

c) Money &
Physicalunits
3.

Cash budget
dealswith
a)Estimated
cashreceipts
b)Estimated
cash
paymentsc)
Estimated
cashreceipts
&Estimated
cash
payments

4.

Purchase of
Furniture is an
examplefor
a)Cashreceipts
b)Cash
payments

c) None of the
above
5.

The opening
balanceofcashin
January

is
Rs.9,000. The
estimated receipts
areRs.14,000and
the estimated
payments are
Rs.10,000. The
opening balance
of cash in
Februarywillbe

a)Rs.21,000
b)Rs.11,000
c)Rs.13,000
(Answers:1.(a);2.
(c);3.(c);4.(b);5.
(c))
II.Other Questions:
1.

DefineBudget

2.

What are the

characteristicsof

abudget?
3.

Write notes on
Cashbudget

4.

What are the

advantages of
cashbudget?

5.

Listthemethods
thatcanbeused
for

the
preparation of
thecashbudget.

6.

Give

few
examples for
cashreceipts?

7.

Give

few
examples for
cashpayments?

8.

Enumerate the
steps in the
preparation of
cashbudget.

III.Problems:
1.

Prepare cash
budget for the
month

of
January 2005
from

the
following
information
1)Cash in hand

(estimated)
Rs.250
2) Cashsalesfor
January, 2005
Rs.6,500
3)Wages for the
monthJanuary
Rs.2,375
4) Cash
purchases
Rs.2,745

5)Interest
receivable on
investments
Rs.175.
(Answe
r:
Balanc
eof
cash
Rs.1,80
5)
240

2.

Prepare cash
budget for the
month

of
Octoberfromthe
following
information
1) Estimated
cash balance
on1stOctober
Rs.1,775
b)Creditsales:

241

October

Periodofcredit
allowedby
suppliersistwo
months
d)Purchaseofplant
e)WagestobepaidinOctobe

(Answer:Rs.

3.
August
September
October

Periodofcredit
allowedto
customersisone
month
c)CreditpurchasesAugust
September

Prepare cash
budget for the
month of March
from

the
following
information
a)Estimated
cashbalanceon
1stMarch
Rs.8,775
b)Creditsales:

January
February
March
Periodofcredit
allowedto
customersisone
month
c)Creditpurchases
January
February
March
Periodofcredit
allowedby
suppliersistwo
months

d)Purchaseofplant
e)WagestobepaidinMarch

Rs.70,000
Rs.80,000
Rs.85,000

(Answer:Rs.

4.

Rs.40,000
Rs.60,000
Rs.50,000

Prepare cash
budget for the
months of June
andJuly2004.
1) Opening cash
balance
estimated in
JuneRs.4,025
2) Cash
purchases in
June
Rs.12,000and
July
Rs.16,000
3) Cash sales in
June
Rs.18,000
and July
Rs.24,000
4) Salaries
payable in
JuneRs.5,000
and July
Rs.5,000
5) Repaymentof
aloaninJuly
Rs.6,500
(Answer:
Closing

balance
June
Rs.5,025;July
Rs.1525)

5.

Prepare a cash
budget for the
monthofAugust
and September
2004 from the
following
information

5.

6.
Credit
Sales
Rs.

June
2004
July
2004
August
2004
September2004
1.

2.

3.

4.

Suppliers
allowedtwo
months
credit.
Customers
were given
one month
credit.
Wages are
payable in
the same
month.
Delay in

1,87,000
1,92,000
1,94,000
1,26,000

payment of
selling
expenses
was one
month.
Commission
receivable
Rs.11,025
inAugust.
Estimated
cash
balance as
on 1st
August
Rs.9,075
(Answer
:August
Rs.
71,500;
Septemb
er
Rs.65,3
00)

6.

Prepare a cash
budget for the
month

of
January,
February and
March 2005
from

the
following
information

242

Month&Year Creditpurchases
Rs.
November
2004
2,00,000
December
2004
3,00,000
January
2005
3,00,000
February
2005
4,00,000
March
2005
5,00,000
1.
2.
3.
4.

7.

243

Creditsales
Rs.
2,50,000
3,50,000
4,50,000
2,00,000
3,50,000

Wages
Rs.
50,000
60,000
60,000
80,000
70,000

ExpectedCashbalanceon1.1.2005isRs.75,000
Suppliersallowedacreditperiodoftwomonths
Acreditperiodoftwomonthsisallowedtocustomers
Laginpaymentofwagesisonemonth
(Answer:JanuaryRs.65,000;FebruaryRs.55,000;
MarchRs.1,25,000)

Fromthefollowing,prepareacashbudgetforAugust&
September2004

Cashpurchases
Cashsales
Creditpurchase
Creditsales
Expenses
1.
2.
3.
4.
5.

July
Rs.

August
Rs.

1,00,000
2,75,000
1,45,000
2,75,000
50,000

2,00,000
3,25,000
2,45,000
3,45,000
60,000

September
Rs.
3,00,000
4,75,000
3,25,000
4,00,000
70,000

EstimatedOpeningbalanceofcashon1stAugustRs.80,000
Creditallowedbysuppliersandtocustomerisonemonth

Expensesarepayableinthesamemonth
DividendreceivableinAugustisRs.16,000
CommissionpayableinSeptemberisRs.2,70,000.

8.

(Answer:AugustRs.2,91,000;SeptemberRs.2,26,000)
Prepare a cash budget for January, February and March
2005fromthefollowinginformation

Month
December
January
February
March

2004
2005
2005
2005

Sales
Rs.

Purchases
Rs.

5,00,000
6,00,000
7,00,000
8,00,000

4,00,000
6,00,000
4,00,000
5,00,000

Expenses
Rs.
55,000
65,000
75,000
85,000

1.

Allsalesareforcash.

2.

Theperiodofcreditallowedbythesuppliersisonemonth.

3.

Laginpaymentofexpensesisonemonth.

4.

Openingcashbalanceon1.1.05isRs.45,000.

5.

InMarch,anassetforRs.2,00,000istobepurchased.
(Answer:JanuaryRs.1,90,000;FebruaryRs.2,25,000;
MarchRs.3,50,000)

9.

Fromthefollowing,prepareacashbudgetforJune&July2005

Cashpurchases
Cashsales
Creditpurchase
Creditsales
Expenses
1.

May
Rs.

June
Rs.

50,000
1,37,500
72,500
1,37,500
25,000

1,00,000
1,62,500
1,22,500
1,72,500
30,000

July
Rs.
1,50,000
2,37,500
1,62,500
2,00,000
35,000

EstimatedOpeningbalanceofcashon1stJuneRs.40,000

2.

Creditallowedbysuppliersandtocustomerisonemonth
244

3.

4.

5.

Expenses
are payable
in the same
month
Dividend
receivable
in June is
Rs.8,000
Commission
payable in
July is
Rs.1,35,000.
(A
ns
we
r:
Ju
ne
Rs
.
1,
45
,5
00
;
Ju
ly
Rs
.1,
13
,0
00

245

10. Prepare a cash

budget for
October,
November and
December 2004
from

the
following
information
Month

Sales
Rs.

September

2004

10,00,00

October

2004

12,00,00

November

2004

14,00,00

December

2004

16,00,00

3)

Allsalesare
forcash.

4)

Theperiodof
credit
allowed by
the suppliers
isonemonth.

5)

Lag in
payment of
expenses is
onemonth.
Opening
balance of

6)

cash on
1.10.04 is
Rs.90,000.
7)

In
December,
an asset for
Rs.4,00,000
is to be
purchased.
(Answer:
October
Rs.3,80,000
;November
Rs.4,50,000
;

April
May
1.

2.

3.
December
Rs.7,00,000)

11. Prepare a cash

budget for the
monthofMarch,
April and May
2005 from the
following
information
Month
January
February
March

Creditpurchases
Rs.
75,000
1,00,000
85,000

4.

5.

6.

1,25,000
90,000
Expected
Cash
balance on
1.3.2005 is
Rs.80,000
Suppliers
allowed a
credit
period of
twomonths
A credit
period of
one month
is allowed
to
customers
Expenses
are paid in
the same
month.
Sale of
fixed asset
Rs. 25,000
inApril.
Purchase of
fixed asset
in May
Rs.25,000.

(Answer:March

balance as
on 1.1.2004
Rs.75,000

Rs.75,000;April
Rs.1,05,000;May
Rs.35,000)

2)

12. Prepare a Cash

BudgetofRama
Ltd., for the
months of
January to
March 2004
from

the
following
information:
CreditPurchases
Rs.
2003
November
December
2004
January
February
March

2,00,000
3,50,000

3)

4)

3,00,000
4,00,000
5,00,000

Additional
Information:
1) Expected
cash
246

Suppliers
allowed
credit of
two months
andacredit
of two
months is
allowed to
the
customers
Lag in
payment of
expenses
onemonth.
Saleoffixed
assets in the
month of
FebruaryRs.
95,000

(Answer:January
Rs.65,000;February
Rs.40,000;
MarchRs.1,1
247