Financial Accounting Part 7

Financial and Management Accounting Unit 7
Unit 7 Final Accounts
Structure:
7.1 Final Accounts – Introduction
7.2 Adjustments before preparing final accounts
7.2.1 Outstanding expenses
7.2.2 Prepaid expenses
7.2.3 Accured Income
7.2.4 Income received in advance
7.2.5 Depreciation
7.2.6 Bad Debts
7.2.7 Provision for doubtful debts
7.2.8 Reserve for Discount on Debtors
7.2.9 Reserve for discount on creditors
7.2.10 Closing Stock
7.3 Trading Account
7.4 Preparation of Trading Account
7.5 Profit and Loss Account
7.6 Preparation of Profit and Loss Account
7.7 Balance Sheet – Meaning
7.8 Preparation of Balance Sheet
Learning Objectives:
After studying this unit, you should be able to understand the following:
1. To understand the process of preparing the final accounts of a business
organization from Trial balance.
2. To incorporate such transactions left out and various adjustments with

regard to transactions taking place after the trial balance but relating to
the current period.
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7.1 Final Accounts – Introduction

The last step of accounting process is preparation of final accounts. Final
accounts are Trading account and Profit and Loss Account with respect to
any trading organization. If it is non trading organization like a club or an
Educational Institution, Receipt and Payment Account and Income and
Expenditure Account are the final accounts. In case of a manufacturing unit,
a Manufacturing account is prepared in addition to Trading Account. Profit
and Loss Account is prepared by all trading and manufacturing units.
Balance Sheet is closely associated with these final accounts. But Balance
Sheet is not an account. It is a statement of assets and liabilities of business
organization prepared at the final stage of the accounting process.
Therefore balance sheet is regarded as a part of final accounts. The
purpose of preparing final accounts is to find out the end result of business
at the end of an accounting period, may it be profit or loss.
The basis for preparing final accounts is the Trial Balance. For Trial
Balance, the ledger balances are the root. For ledger accounts, the journal
entries or entries in the subsidiary books (Books of original entry) are the
roots. Hence the final accounts reflect the original business transactions,
which are systematically and scientifically recorded, classified, and
analyzed. Final accounts provide bundle of information for decision making
activities.
Objectives:
1. To know the meaning and purpose of final accounts
2. To identify the items of Trading Account
3. To identify the items of Profit and Loss Account
4. To identify the items of assets and liabilities of a Balance Sheet and
modes of preparing it.
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5. To know the adjustments such as Reserve for bad debts, Reserve for
discounts on Debtors, Reserve for discount on Creditors, bad debts out
side the trial balance.
6. To understand the adjustments like depreciation on assets, closing
stock, stock lost in fire, goods given as samples, goods used for
personal purpose etc.,
7. To know the adjustments of prepaid expenses, outstanding expenses,
pre-received incomes, outstand incomes etc.
8. To prepare Balance Sheet without any adjustments from trial balance.
9. To prepare Balance Sheet with adjustments.
7.2 Adjustments before preparing final accounts

The Generally Accepted Accounting Principles (GAAP) supports the accrual
basis of accounting, according to which revenue is recognized when it is
earned and expenses are recognized when they are incurred, irrespective of
their actual receipt or actual payment.
If the accrual basis of accounting is used, adjusting entries are required at

the end of the period to record any changes in assets, liabilities, revenue
incomes, revenue expenses, previously unrecognized. Adjusting entries are
regarded as internal transactions. For instance, salaries are paid in advance
to a few employees and the excess paid in the current period, should be
adjusted to the coming period and what is paid in advance now should not
be charged against the revenues relating to the current period. Similarly,
insurance paid in advance, rent paid in advance etc., Like wise incomes
received in advance should not be considered for the current period. On the
other hand, expenses yet to be paid for the current period should be
charged against the current period’s income. On the same lines, incomes
yet to be received for the current period should be considered as incomes
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for the current period whether actually received in cash or not. Every asset
is subject to wear and tear and the value of the asset gets reduced even if
the loss on account of this is not recorded by means of a journal entry.
Some stock of goods at the end of the period is left over and it has to be
valued and be taken to accounts for fair computation of profit. Such internal
adjustments have to be made and recorded before preparing Trading
Account, Profit and Loss Account and Balance Sheet. The adjustments to
be incorporated are briefly described in the following paragraphs.
Self Assessment Questions 1:

1. Final account are prepared from trial balance, trial balance from ledger
accounts and ledger account from books of original entry. So final
accounts are reflection of original transaction (state True / False ).
2. Final accounts speak about profit or loss as on a particular day ( state
True and False )
3. Balance sheet tells the value of assets and liability as standing an a the
last day of accounting period ? ( True / False ).
4. Adjustment in final accounts is necessitated because of accrual basis of
accounting (state True / False ).
5. Adjusting entries are also regarded as ______ .
6. Adjustments such as outstanding and prepaid / received items are
needed to find out _____________.
7. Adjustment entries are made before preparing tracking and P & L and
balance sheet (True/False ).
7.2.1 Outstanding expenses

Expenses due but not yet paid are known as outstanding expenses. Wages,
salaries, rent, commission etc payable in the current month are paid in the
following month. If final accounts are prepared for year ending 31st
December, then the expenses payable for December will be paid in January
of next year. The extent to which the amount belongs to the current year but
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payable in the next year is called outstanding expenses. To record that

aspect, the journal entry drawn in the Journal proper is:
Concerned Expenses account Dr
To outstanding Expenses account.
Outstanding expenses account indicates liability for the current year and it
will appear in the balance sheet.
Example: Advertisement expenses for year 31-12-2003 outstanding is
Rs.5000. The journal entry is
Advertisement expenses account Dr 5000
To Outstanding expenses account 5000

1. Expenses due but not yet paid are known as ___________.
2. What is the entry if salaries are outstanding ?
3. If ‘outstanding expenses’ appear in trial balance, what does it mean ?
4. Outstanding expenses appear an assets side of balance sheet ( state
True / False ).
7.2.2 Prepaid Expenses
Expenses paid in advance are regarded as prepaid expenses. Prepaid
expenses form an asset and therefore prepaid expenses account is debited.
For example, insurance premium is paid from April, 2004 to March, 2005
and the amount is Rs.3600. The financial year ends by 31st December,
2004. Therefore the premium relating to Jan, Feb and Mar of 2005 Rs.900 is
said to have been paid in advance. To record this internal adjustment, the
entry is
Prepaid Expenses account Dr 900
To Insurance account 900
Note that outstanding or prepaid expenses accounts are regarded as
personal accounts.
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1. Expenses paid even before incurred. They are know as _____.
2. Prepaid expenses appear on the asset side of balance sheet. ( state
True / False).
3. Opening balance of prepaid insurance is Rs 1000; insurance paid during
the year Rs. 5600; Insurance paid in advance include in the above is Rs
800: Find out actual expenditure for insurance for the current year.
4. Prepaid expenses account is a personal account ( True / False).
7.2.3 Accrued Income

Accrued income is also called outstanding income. Outstanding income
account is a personal account and it represents an asset. This account is
credited and the concerned income account is debited in the journal proper
as an adjusting entry. The entry is
Outstanding incomes account Dr

To Concerned income account
Example
Interest accrued on Fixed Deposit of Rs 200000 at 12% simple interest on
31-12-2006, not yet received. The entry is
Outstanding incomes account Dr 24,000
To interest on FD account 24,000
Outstanding Income account appears as an asset in the balance sheet.

1. Income earned but not received is called ____________.
2. Outstanding income is an asset ( state True / False ).
3. Outstanding income is a personal account. (True / False ).
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7.2.4 Income received in advance

Just as income is accrued, there are instances where income is received in
advance. The amount is shown as liability in the balance sheet and it shows
a credit balance. The adjusting entry to record the income received in
advance is
Concerned item of income account Dr

To Income received in advance account
Example
Rent received for one year from 1-4-2005 to 31-3-2006 Rs.48000. Accounts
are finalized on 31-12-2005. Therefore rent received for January, February
and March of 2006 is said to have been received in advance Rs.12000. The
entry is
Rent received account Dr 12000

To Income received in advance a/c 12000

1. Any income received in advance is a liability (state True / False ).
2. What is the adjusting entry for rent received in advance ?
3. Income received in advance in the current year is ________ from the
unearned item of income received.
7.2.5 Depreciation
Depreciation is reduction in the value of an asset due to constant use of the
same, which is called wear and tear. Fixed assets like, buildings, plant,
machinery, furniture etc., are subject to depreciation. Whenever, an asset is
depreciated, its value goes down and therefore it is a loss to the
organization. Depreciation account is debited and the concerned asset
account is credited. The item of depreciation may appear in the trial
balance, which means that already the concerned asset is reduced by the
amount of depreciation. If depreciation is given as an additional adjustment,
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then the depreciation amount should be charged against profit and loss
account on one hand and the concerned asset account is reduced on the
other hand in the balance sheet.
There are two popular methods of depreciation, namely fixed installment

method and reducing balance method. In fixed installment method,
depreciation is calculated on cost of the asset. In case of reducing balance
method (Diminishing balance method), the depreciation is charged on the
reducing balance of the book value of the asset. Reducing balance method
is more popular and well recognized.
Example
Building is of the book value of Rs.400000. It is depreciated at 10% on fixed
installment method. Show the journal entry and how does it appear in the
balance sheet?
Solution
The entry for depreciation is
Depreciation account Dr 40,000

To Building account 40,000
Depreciation being a loss is transferred to profit and loss account and in the
balance sheet, the value of Building is shown as Rs.400000 – 40000 =
360000.
Note: For the second year the depreciation will be Rs.40000 if the asset is
depreciated under fixed installment method. If it is depreciated under
reducing balance method, the depreciation for the second year is Rs.36000
(10% of 360000).

1. Depreciation is for __________ of an asset.
2. What entry is drawn if depreciation is provided ?
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3. When depreciation account is transferred to P & L A/c , what entry do

you draw ?
4. If depreciation to be provided in the adjustments, what do you

understand by this ?
5. What is the method of depreciation recognized by Indian Income Tax

Act?
6. If depreciation appears in the trial balance, what does it indicate ?
7.2.6 Bad Debts

Bad debts are those debts which are not recovered. Bad debts form loss to
the business and reduce the amount of debtors. Since bad debts are losses,
they are debited and the debtor’s account is credited because the
outstanding amount of debtors comes down.
If bad debts are identified well before preparing trial balance, then bad debts
appear in the trial balance and they should be taken to the debit side of
profit and loss account. Since debtors account is already reduced by the
amount of bad debts, it does not require any further adjustment in the
balance sheet.
If bad debts are shown outside the trial balance, which means that they are
identified after the preparation of Trial Balance, then two adjustments should
be incorporated. One – bad debts should be charged against profits in P & L
A/C and the second – the debtor’s account should be reduced by the
amount of bad debts in the balance sheet on the asset side.
Example
The sundry debtors for the year 2005 are Rs.50000. The bad debts
amounted to Rs.4000 as on 31-12-2005 already shown in the trail balance.
Write off further bad debts Rs5000. Show how the above internal
adjustments appear in the final accounts.
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Solution
 There are bad debts shown in the trial balance Rs4000 and not shown in
the trial balance Rs.5000. To incorporate those bad debts not yet shown
in the trial balance, the adjusting entry is
Bad debts account Dr 5000
To Debtor’s account 5000
 In the profit and loss account of 2005, the total bad debts appearing on
the debit side are Rs. 9000(4000 + 5000)
 In the balance sheet, on the asset side, the amount of debtors is
Rs45000(50000 -5000).

1. Unrecovered debts are called ______.
2. Bad debts are not expenses but they form losses. (state True / false )
3. What is the entry made in journal proper, if bad debts are recorded.
4. What entry do you make to close the bad debts ?
5. What impact bad debts have on profits ?
6. If bad debts are recovered, what entry can be drawn ?
7.2.7 Provision for Doubtful Debts

Debts that can not be recovered are called bad debts but debts, the
recovery of which is doubtful, are called doubtful debts. From the past
experience of the business proprietor, what percentage of good debts may
become bad in future, can be estimated and in the current year itself an
equal amount of profit be set aside. This provision is known as Reserve for
Bad Debts or Provision for Doubtful Debts or Reserve for Doubtful Debts.
Since the provision for bad debts is a charge against current year profit, the
adjusting entry is to debit P & L A/C and credit Provision for Bad Debts
Account.
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Profit and Loss Account Dr

To Provision for bad debts account
Provision for bad debts is a liability to be incurred in future and so it should
appear on the liability side of balance sheet. However, the convention is -
RBD (Reserve for Bad and Doubtful Debts) is deducted from the amount of
good debtors. The important note here is that RBD is computed as a
percentage of good debts, which means total debtors minus bad debts
unadjusted.
Provision for bad and doubtful debts is a running account and every year the
amount keeps on changing because from the provision made in the current
year, bad debts occurring in the following year have to be adjusted and
additional amount of provision to be made is calculated. Every year, the
amount transferred to P & L A/C is B + N – O, where B stands for bad debts;
N stands for new provision and O stands for old reserve. For example, the
old reserve stands at Rs.15000 and bad debts to be adjusted is Rs4000 and
new reserve to be maintained is Rs18000. The amount to be charged
against profits in P&L A/C is Rs.7000 (4000 + 18000 – 15000). The formula
can also be shown as
N - O + B = 18000 – 15000 + 4000 = 7000

1. What is the difference between Bad debts and doubtful debts?
2. Provision is made for Debts which have become bad (state True /
False).
3. Provision for Doubtful debts is a change against the profits of the firm
(state True / False )
4. Bad debts incurred in the subsequent period are written off against
reserve for bad debts (state True / False ).
5. What is the entry for writing off of bad debts against RBD?
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6. If RBD is freshly to be provided, what entry can be draw?

7. RBD is calculated on debtors which are good and so any bad debts out
side trial balance should be deducted out of total debtors (state True /
False ).
Illustration:
On 1st January 2006, the RBD account stood at Rs.9000 in the books of a
merchant. The bad debts written off during the year ended 31st December,
2006 amounted to Rs.4800 and Sundry Debtors stood at Rs.480000. It was
desired to maintain the reserve for bad debts at 5% on Debtors. During the
year 2007 bad debts written off amounted to Rs.12000 and sundry debtors
on 31st December 2007 amounted to Rs.380000.As usual 5% reserve was
required. Show the journal entries for recording the above transactions and
write up the bad debts reserve account.
Solution
Journal Entries
Debit Credit
Date Particulars LF
Rs. Rs.
2006 Bad debts account Dr 4800
st
Dec, 31 To Sundry Debtors Account 4800
(Being the bad debts written off)
st
Dec, 31 Bad Debts Reserve account Dr 4800
To Bad Debts account 4800
(Being bad debts set off against
Dec 31
st RBD)
19800
Profit and Loss Account Dr 19800
To Bad Debts Reserve account
(Being additional RBD made to
bring the reserve to 5% of 480000)
12000
2007 Bad debts account Dr
12000
Dec, 31
st To Sundry Debtors account
(Being bad debts written off )
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Bad debts Reserve account Dr

Dec 31
st
To bad debts account 12000 12000
(Being bad debts written off against
RBD)
Profit and loss Account Dr
Dec 31st To Bad debts reserve account 7000
7000
(Being additional RBD made to
bring the reserve to 5% of 380000)
NOTE:
On January 1st 2006, the RBD account stands at Rs9000 and during the
year the actual bad debts are Rs4800 and so there is unused balance of
Rs.4200 (9000 -4800). It is desirable to have reserve of 5% of 480000 –
Rs24000. Therefore additional reserve required to be provided in P & L A/C
is Rs19800 (24000 – 4200).
Similarly during 2007 the actual bad debts are Rs.12000 and the available
reserve is used for writing it off. Still there is a balance left over is Rs.12000
(24000 – 12000). The additional reserve to be maintained is 5% of 380000,
that comes to Rs19000. So the additional amount to be provided in P & L
A/C in 2007 is Rs.7000 (19000 – 12000).
Reserve for Bad Debts Account
Dr Cr
J Amount J Amount
Date Particulars Date Particulars
F Rs. F Rs.
2006 2006
st st
Dec, 31 To bad debts 4800 Jan, 1 By Balance b/d 9000
To balance c/d 24000 Dec 31st By P&L A/C 19800
Total 28800 Total 28800
2007 2007 By balance b/d 24000
st
Dec,31st To bad debts 12000 Jan 1
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7.2.8 Reserve for Discount on debtors:

There are two types of discounts allowed to customers in a business. One is
trade discount and another is cash discount. Trade discount is given to
customers to retain the customers and it is shown in the invoice itself. It
means that trade discount does not come to accounting records at all. But
cash discount is allowed to customers to encourage them to pay cash
promptly at the earliest. Normally cash discount gets recorded in cash
account. Out of experience, a businessman can guess how much of cash
discount he may have to give on customer’s accounts. Cash discount given
to debtors is always a loss and is shown as expenditure in the Profit and
Loss Account. After anticipating the amount of cash discount allowable, a
provision is made in the current year itself. In the subsequent years, the
actual discount allowed is set off against the provision for discount on
debtors. Every year, the amount of provision for discount on debtors is
deducted from the profits. The entry for making the provision is
Profit and Loss Account Dr
To Provision for discount on debtors account
Just as in the case of provision for bad and doubtful debts, the bad debts
are first written off against provision for bad debts and later the required
amount of provision is provided in the P&L A/c, similar procedure takes
place in the case of provision for discount on debtors. The following guide
lines may be kept in mind while dealing with the reserve for discount on
debtors
1. If a reserve for discount on debtors is not existing and cash discount is
allowed, then transfer the discount to P&L account.
2. Any fresh reserve for discount on debtors is to be made, debit the P&L
A ccount with the amount of reserve.
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3. If provision for discount on debtors exists at the time of providing

discount, then write off the discount from the provision already made
for the purpose.
4. New provision should then be calculated and only as much as required
to bring the existing provision to the new figure should be debited to
P&L Account.
5. If the new provision required is lower than the provision already existing
(old), then the difference shows profit and transfer the same to P&L
Account.

1. what is the aim of giving cash discount ?
2. If discount is allowed against receivables, what entry do you draw in
journal proper?
3. Provision for Discount on debtors is a charge against P & L a/c. (state
True / False).
4. Provision for discount on debtors appears as a liablility in the balance
sheet ( state True / False )
5. What is the basis for calculating provision for discount an debtors?
Illustration
The following items are found in the trial balance of Praksh on 31st
December 2000.
Sundry Debtors Rs. 160000
Bad Debts written off 9000
Discount allowed to Debtors 1800
Reserve for Bad and doubtful Debts 31-12-1999 16500
Reserve for discount on Debtors 31-12-1999 3200
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You are required to provide for the bad and doubtful debts at 5% and for
discount on debtors at 2%. Give necessary journal entries and show bad
debts account, bad debts reserve account, discount account and provision
for discount on debtors account.
Solution
Debit Credit
Date Particulars LF
Rs. Rs.
2000 RBD account Dr 9000
st
Dec, 31 To Bad Debts account 9000
(Being bad debts written off against
existing RBD)
Dec 31st P & L Account Dr 500
500
To RBD account
(Being addition to RBD to make the
new RBD equal to 5% of 160000)
st
Dec 31 Reserve for discount on debtors
account Dr
1800
To Discount on Drs A/c 1800
(Being discount on debtors written
off against Reserve for discount on
Debtors)
Dec 31st P & L Account Dr

1640
To Reserve for discount
On debtors account 1640
( Being additional reserve made to
make the new reserve for discount
on debtors to 2% of 152000)
NOTE:
1. The amount debited to P&L Account towards RBD is computed as
follows
Old RBD = Rs. 16500
Less Bad debts = 9000
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Balance = 7500
New RBD @5% on160000 = 8000
RBD to be provided = 500 (8000-7500)
2. The amount debited to P&L Account towards Reserve for Discount on

Debtors is computed as follows:
Good Debtors = 160000 – 8000 (New RBD)=152000
Old Res for Dis On Drs = Rs. 3200
Less Discount on Drs = 1800
Balance Reserve = 1400
New Res for Disc at 2%
On good drs 152000 = 3040
Res for Discount to be
Provided now = 1640 (3040 -1400)
Bad Debts Account

Dr Cr
Amount Amount
Date Particulars JF Date Particulars JF
Rs. Rs.
2000 2000
st
Dec, 31 To Sundry debtors Dec 31st By RBD account 9000
account 9000
Reserve for Bad Debts Account

Dr Cr
Date Particulars JF Amount Date Particulars JF Amount
Rs. Rs.
2000 2000
st st
Dec, 31 To bad debts 9000 Jan, 1 By Balance b/d 16500
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Discount on Debtors Account

Dr Cr
Amount Amount
Rs. Rs.
2000 2000
st
Dec, 31 To Sundry debtors Dec 31st By Reserve for
account 1800 Discount on 1800
Debtors A/C
Dr Reserve for Discount on Debtors Account Cr

Amount Amount
Rs. Rs.
2000 2000
st st
Dec, 31 To Discount on 1800 Jan, 1 By Balance b/d 3200
Debtors 3040 Dec 31st By P&L A/C 1640
To balance c/d
In the balance sheet, the Sundry debtors are reduced by bad debts shown
out side the trial balance, the new RBD, discount on debtors shown out side
the trial balance and the new Reserve for discount on debtors.
7.2.9 Reserve for discount on creditors

Just as reserve is for discount on debtors is created, reserve for discount on
creditors is also created. Businessman expects that he would receive
discounts from suppliers (creditors), when the businessman remits cash to
them. Anticipating some percentage of creditors being received as discount
in the coming year, the business proprietor makes a provision for the
expected income in the current year itself. Discount on creditors is an
income and therefore reserve for discount on creditors is debited and profit
and loss account is credited to show it as anticipated profit. In the
subsequent year, when discount on creditors is actually received, it is first
set of against provision for discount on creditors and the difference between
the new provision for discount on creditors and the balance of old provision
left over is carried to P&L Account.
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Discount on creditors is income and to that extent the creditors due is

reduced. So the journal entry to record them is
Creditor’s account Dr
To discount on creditors account
Later if the discount received is adjusted against reserve for discount on
creditors, the entry will be
Discount on creditor’s account Dr
To Reserve for discount on creditors
When provision for discount on creditors is made in P&L Account, the entry
will be
Reserve for discount on creditors account Dr
To Profit and loss account
The amount of provision for discount on creditors is calculated at a

percentage on creditors. In the balance sheet, creditors are shown after
deducting reserve for discount on creditors.

1. Discount on creditors is an item of income (state True / false ).
2. Provision for discount on creditors is shown as an anticipated income
(State True/False ).
3. How do you treat provision for discount an creditors in balance sheet ?
4. Discount received from creditors subsequently is changed against
provision for discount on creditors. (state True / False ).
7.2.10 Closing stock

Stock of goods – raw materials, semi finished goods, finished goods – at the
end of the accounting year should be considered for preparing trading
account and balance sheet. It is an internal adjustment. Closing stock is
normally valued at cost or market price which ever is lower, even though
there are several other methods to value stock. Closing stock does not
appear in the trial balance because the value of it is ascertained only after
the preparation of trial balance. To bring to the records, a journal entry is
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passed in journal proper by debiting closing stock account and crediting

trading account. In the balance sheet, closing stock appears as an asset.

6. what is the popular valuation method of closing stock ?
7. what is the entry for adjusting the closing stock ?
8. what does happen in case closing stock is not considered for computing
gross profit ?
9. Closing stock always appears as an asset in balance sheet. (state True /
false).
7.3 Trading Account

Trading account shows gross profit or gross loss arising out of trading
activities. Trade means buying and selling. The account mainly focuses on
finding the result of goods bought and goods sold. Interestingly, goods are
bought for a cost and the proprietor incurs a few items of purchase
expenses and the goods are sold at a price higher or lower than the cost
incurred. At the end of accounting period, some stock is left over and it
should be valued so as to calculate the profit or loss from the cost of goods
sold. Therefore, opening stock of goods, cost of purchases made, expenses
on purchases are taken on debit side of the trading account. On the credit
side of the account, the sales of goods and the value of closing stock are
shown. The excess of credit over debit is gross profit and vice versa. The
gross profit or gross loss is transferred to Profit and Loss Account. The
format of a Trading Account is given below:
Dr Trading Account for the year ending- - - - Cr

Particulars Rs. Particulars Rs.
To opening stock By sales
To Purchases Less returns inwards/sales
Less Purchasereturns/returns outwards returns
To Carriage inwards By Closing stock
To freight and octroi
To wages
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Add outstanding wages

Less prepaid wages
To fuel and power
To Gas, coal, electricity for production
To Import duty and clearing charges
To stores consumed
To factory rent, insurance, factory expenses
To other direct expenses
To Royalty paid
To Profit and Loss A/c (Gross Profit)
Note: For every expenditure, outstanding and prepaid aspects must be

considered.
From the above account, it is easy to learn the transferring entries made to
close the accounts of expenses and incomes. The transferring entries are
1. Trading account Dr
To opening stock a/c
To purchases a/c/
To Wages a/c
To Royalty paid a/c etc
(Being all expenses of trading transferred to trading account)
2. Sales account Dr
Closing stock account Dr
To Trading account
(Being sales and closing stock transferred to trading account)
3. Trading account Dr
To Profit and Loss Account
(Being gross profit carried forward to P&L A/C)
4. Profit and Loss Account Dr

To Trading account
(Being gross loss transferred to P&L Account)
Page No.: 155


1. Trading account is an account showing profit on cost of goods sold.
(state True / False).
2. Cost of goods sold include opening stock + Purchase expenses –
closing stock. (state True/ False ).
3. Gross profit is ______minus cost of goods sold.

4. Gross profit or loss is transferred to ___________ account.
7.4 Preparation of Trading Account

To prepare Trading Account, the following steps may be followed:
a) Identify the items of expenses relating to trading and show them on the
debit side of Trading Account.
b) Effect the adjustments such as outstanding or prepaid to the relevant
items of expenses
c) Show the sales less returns and closing stock on the credit side of
trading account
d) The difference is gross profit if credit total is more than debit and gross
loss if debit total is more than credit.
e) Transfer the gross profit or gross los to Profit and Loss Account as the
case may be.

1. Do you consider gross purchases or net purchases, while preparing
trading account ?
2. Do trading concerns prepare manufacturing account ?
Page No.: 156

Illustration
From the following balances extracted from Trial balance, prepare Trading
Account. The closing stock at the end of the period is Rs. 56000
Amount in
Particulars
Rs.
Stock on 1-1-2004 70700
Returns inwards 2000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials received from 6000
abroad 7000
Clearing charges 12000
Rent of business shop 10000
Royalty paid to extract materials 2000
Fire insurance on stock 8000
Wages paid to workers 10000
Office salaries 1000
Cash discount 4000
Gas, electricity and water 250000
Sales
Page No.: 157

Dr TRADING ACCOUNT FOR THE YEAR ENDING - - - - Cr
Particulars Rs Particulars Rs
To stock on 1-1-2004 70700 By sales 250000

To Purchases 102000 Less Returns
247000
Less Returns Inwards 3000
99000 56000
Outwards 3000 By Closing stock
To Carriage inwards 5000
To import duty 6000
To Clearing charges 7000
To Royalty 10000
To Fire Insurance 2000
To Wages 8000
To Gas, electricity, water 4000
To P & L Account (GP) 91300
303000 303000
7.5 Profit and Loss Account

Profit and los account is an important final account in the sense that the net
result of the business in the form of net profit or net loss is disclosed by
preparing the same. All business expenses like administrative expenses,
office expenses, selling and distribution expenses are shown on the debit
side of the account. Besides, all provisions made for different purposes such
as reserve for bad debts, reserve for discount on debtors, reserve for
repairs, depreciation etc., also picture on the debit side of the account. On
the credit side of the account, all incomes of revenue in nature, reserve for
discount on creditors and gross profit carried from trading account are
mentioned.
In this connection, it is important to note that Trading and Profit and Loss
Account are regarded as revenue accounts. Any capital receipts or capital
Page No.: 158

payments are not considered while preparing them. In brief, revenue

receipts are those which are received regularly arising out of day to day
activities of the business and similarly revenue payments, which are known
as expenses are incurred regularly and for every day functions of the
business. Capital receipts are in the form of sources of funds such as
capital received, sale of capital asset like building etc., Capital payments
are those spent for acquisition of capital assets, incurring capital
expenditure etc.,
The transferring entries are drawn to prepare Profit and loss account. They
are

To all expenses account To Transfer all expenses
2. All Incomes account Dr

To Profit and Loss Account To Transfer all incomes

To Capital account To Transfer Net Profit to Capital
4. Capital account Dr
To Profit and Loss Account To Transfer Net loss to Capital
Dr Profit and Loss Account for the year ending --- Cr
To Trading Account (GL) By Trading account (GP)
To Salaries + Out standing – By Interest earned + Accrued
Prepaid salaries as per interest as per adjustments
adjustments By Commission earned
To Rent of the premises By discount earned
To Travelling expenses By Rent received
To Rates and Taxes By Bad debts recovered
To Printing and stationery By Interest on drawings
Page No.: 159

To Postage and Telegram By Reserve for discount on

To Telephone charges Creditors
To Insurance –Prepaid By Dividends received
amount as per adjustment By Royalty Received
To Interest paid By Capital Account( Net Loss)
To Discount allowed
To Sundry expenses
To Advertisement
To Commission
To Carriage outwards
To Bad Debts
To Reserve for Bad debts
To Reserve for discount on
Debtors
To Depreciation
To Legal charges
To Audit fee
To Interest on Capital
To Capital Account (Net
Profit)
7.6 Preparation of Profit and Loss Account

The following steps may help to prepare Profit and Loss Account
1. Identify the expenses and bring them to debit side of P&L Account
2. Identify the revenue incomes and put them on the credit side of P&L
Account
3. Check whether all adjustments like outstanding, prepaid, pre received

expenses and incomes as the case may be are brought to the account
4. Check the transfer of reserves to the relevant sides of the account
5. Transfer the net profit / net loss to the capital account

1. What types of expenses are shown on the debit side of P & L account ?
Page No.: 160

2. P & L account is revenue account showing the revenue net profit or loss
for the accounting period(state True / False ).
3. Painting for a new building, Installation expenses paid to install a plant,
amount spent for advertising for promotion of sale of a product are
revenue expenses (state True / False ).
4. Net profit / loss is carried to owners equity / capital (state True / False )
Illustration
The following Trial Balance is extracted from the books of a merchant on
31-12-2004.
Rs
Particulars
Furniture and fittings 640
Motor Vehicles 6250
Buildings 7500
Capital Account 12500
Bad Debts 125
Provision for Bad debts 200
Sundry Debtors 3800
Sundry Creditors 2500
Stock on 1-1-2004 3460
Purchases 5475
Sales 15450
Bank Over Draft 2850
Sales Returns 200
Purchase Returns 125
Advertising 450
Interest on Bank Over Draft 118
Commission 375
Cash 650
Taxes and Insurance 1250
General Expenses 782
Salaries 3300
Page No.: 161

The following adjustments are to be made.

1. Stock in hand on 31-12-2004 was Rs3250
2. Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and
Motor Vehicles @ 20%.
3. Rs.85 is due for interest on bank overdraft.
4. Salaries of Rs300 and taxes Rs.120 are outstanding.
5. Insurance amounting to Rs.100 is prepaid
6. One-third of the commission received is in respect of work to be done

next year
7. Write off a further sum of Rs.100 as bad debts and provision for bad and
doubtful debts to be made equal to 10% on sundry debtors.
8. Prepare Trading Account and Profit and Loss Account.
9. Dr Trading Account for the year ending 31-12-2004 Cr
To Stock on1-1-2004 3460 By Sales 15450

15250
To Purchases 5475 Les Returns 200
3250
Less returns 125 5350 By Closing Stock
To P & L A/C (GP) 9690
Page No.: 162

Dr Profit and Loss Account for the year ending 31-12-2004 Cr

To Salaries 3300 By Trading Account (GP)
Add Outstanding 300 3600 By Commission 375 9690
To Advertising 450 Less Pre-received 125
To Interest on OD 118 250
Add Outstanding Int 85 203
To Taxes and
Insurance 1250
Add Out standing tax 120
1370 1270
Less Prepaid Insurance 100 782
To General expenses 125
To bad debts
To RBD(New) 370 270
Less old RBD balance 100
To Depreciation:
On Bldgs @ 5% 375
On FF @ 10% 64 1689
On M Vehicles @20% 1250 1551
To Capital Account (NP)
Note:
Sundry Debtors are Rs.3800 and there have been bad debts outside TB
Rs100. The good debtors are Rs.3700. The new RBD is 10% of 3700,
i.e.Rs370. The old RBD unspent is Rs100 (200 -100). Therefore RBD to be
charged against profit is Rs270
7.7 Balance Sheet

Balance Sheet is the sum and substance of financial performance a
business undertaking. It shows the assets and liabilities of business on a
particular day. It is not an account but is a statement of affairs. The
statement of assets and liabilities is prepared, having two sides, left side
Page No.: 163

containing capital and liabilities and on the right side, containing assets and
properties. Often the statement is prepared vertically, mentioning sources of
funds first and later application of funds. Sources of funds indicate capital
and liabilities and application of funds indicate assets.
Balance Sheet is prepared from Trial Balance. In case of sole trader

organization and Partnership organization, the format of preparing Balance
Sheet is arranged basing on liquidity of the assets. In case of Companies,
the Companies Act, 1956 has specified a definite pattern of preparing
Balance Sheet. Both the models of preparing Balance Sheet are stated
here under.
BALANCE SHEET FOR THE YEAR ENDING 31-12-2003 OF Mr. X

Capital and Liabilities Rs Assets Rs
Sundry Creditors Cash in hand
Less Reserve for Discount on Cash at Bank
Creditors Land and Building
Bills Payable Add Additions if any
Bank Over Draft Less depreciation
Loans Borrowed Plant and Machinery less
Outstanding Expenses depreciation
Pre-received Incomes Furniture and Fixtures less
Capital (Opening) depreciation
Add Additions to capital Sundry debtors
Add interest on capital if any Less Bad debts out side Trial
Add Net profit as per P&L a/c Balance
Less personal drawings Less Reserve for Bad Debts
Less Net loss as per P&L A/C Less Reserve for discount on
Debtors
Bills Receivable
Loans and advances given to
others + Interest outstanding
Investments + outstanding income
on investments
Other outstanding incomes
Pre-paid expenses
Closing stock
Total Total
Page No.: 164

The Format of Balance Sheet of a Company

Capital: Fixed Assets:
Authorised, Issued, Goodwill, Land
Subscribed,Called up, Buildings,Furniture, Fixtures,
Paid-Up capital with Equipment, Plant, Machinery,
adjustments Copy Rights, Patents
Reserves and Surplus Investments
Loans and Borrowings Loans and Advances
Long Term Loans Current Assets:
Short Term Loans Debtors, B/R, Inventory,
Cash, Bank, Outstanding
Current Liabilities: incomes, Prepaid expenses
Sundry Creditors, B/P, etc
Outstanding expenses,
pre-received incomes,
dividends payable, etc.,
Total Total

1. The two sides of a balance sheets are ____ and ___________.
2. balance sheet is prepared on the bases of trial balance. (state True /
False ).
3. balance sheet portrays the financial soundness of a concern (state True
/ False).
7.8 Preparation of Balance Sheet

A few guide lines are given here under to prepare balance Sheet of a
business concern. Balance Sheet is not an account and there is nothing like
debit side and credit side. If Trial Balance tallies, naturally Balance Sheet
also tallies:
1. Identify all assets from the trial balance. Assets are shown on the debit
side of T.B
2. Identify all liabilities from the Trial Balance and they are on the credit
side of TB.
Page No.: 165
3. Make a mark of items with respect to which adjustments are given out
side the TB
4. All adjustments should find place in two places, one either in Trading
account or in Profit and Loss Account and another invariably Balance
Sheet. For example, closing Stock given outside TB is first shown on the
credit side of Trading Account and it is shown as an asset in the Balance
Sheet. ‘Bad Debts Reserve to be provided’ appears in P&L Account and
later shown as a deduction from Sundry Debtors in the Balance Sheet.
Similarly depreciation is charged against profits first and later deducted
from the book value of concerned asset in the balance sheet.
Illustration 1
From the Trial Balance given in para 6, prepare Balance Sheet of the
merchant as on 31-12-2004.
Solution
Balance Sheet as on 31-12-2004
Sundry Creditors 2500 Cash 650
Bank Over Draft 2850 Building 7500
Add interest due 85 2935 Less Depreciation 375 7125
Commission received in Furniture and Fixtures 640
advance 125 Less Depreciation 64 576
Outstanding Taxes 120 Motor Vehicle 6250
Outstanding Salaries 300 Less Depreciation 1250 5000
Capital 12500 Sundry Debtors 3800
Add Net Profit 1551 14051 Less bad debts as per
Adjustments 100
Balance 3700
Less Reserve for Bad
Debts(New) 370 3330
Closing Stock 3250
Pre-Paid Insurance 100
Page No.: 166

NOTE: Every adjustment given outside Trial Balance finds place in two
accounts –Trading account / Profit and Loss Account and invariably in
Balance Sheet.

1. What is the purpose of creating Reserve for Bad debts?
2. State the purpose of creating reserve for discount on creditors.
3. Insurance paid on 1-1-2000 up to 31-12-2000 Rs.4800. If the books are
closed on 31-7-2000, what is the amount of prepaid insurance?
4. Select the most appropriate answer.
i) Sales are equal to a) Cost of goods sold + Profit b) Cost of goods
Sold – Gross Profit c) Gross Profit – Cost of Goods sold
ii) Interest on Drawings is a) Expenditure for the business b) Expensef
or the business c) Gain for the business
iii) Goods given as samples should be credited to a) Advertisement
account b) Sales account c) Purchases account
iv) Out standing salaries are shown as a) an expense b) a liability
c) an asset
v) Income tax paid by a sole trader on his business income should be
a) debited to the Trading Account b) debited to P&L Account
c) deducted from capital account in the Balance Sheet
5. Stock at the end, if appears in the Trial Balance is taken only to the
Balance Sheet – Yes or No?
6. Goods taken by the proprietor for personal use are credited to sales
account – Yes or No?
7. Salary paid in advance is not an expense because it neither reduces
assets nor increases liabilities. – Yes or No?
8. Balance Sheet is an account because it is included in the scope of final
accounts – Yes or No
Page No.: 167

Terminal Questions
1. In taking out a Trial Balance, a Book keeper finds that debit total
exceeds the credit total by Rs.611. The amount is placed to the credit of
a newly opened Suspense Account. Subsequently the following
mistakes were discovered. You are required to pass the necessary
entries for rectifying the mistakes, and show how Suspense account.
(a) Sales day book was over cast by Rs.1000
(b) A sale of Rs.50to Sri Ram was wrongly debited to Sri Krishna
(c) General expenses Rs.180 were posted as 801
(d) Cash received from Bhatt was debited to his account RS.450
(e) While carrying forward the total from one page of the Purchases
book to the next, the amount of Rs.1235 was entered as Rs.1325.
2. Rectify the following errors:
(i) Furniture purchases for Rs.2500 was debited to Purchases
account
(ii) A sum of Rs.500 paid to Lalitha was debited to Shantha
(iii) A bill receivable for Rs.1000 received from Kumar has been
omitted to be entered.
(iv) Goods worth Rs2040 taken away by the proprietor were debited to
Bharath
(v) An engine purchased for Rs.12500 had been posted to Purchases
account
3. An accountant could not tally the Trial Balance. The difference was
temporarily transferred to Suspense account for preparing the final
accounts. The following errors were later discovered.
(a) The sales book was under cast by Rs.500
(b) Entertainment expenses Rs.950 though entered in the cash book
were omitted to be posted in the ledger.
Page No.: 168

(c) Discount column of the receipt side of cash book was wrongly
added as Rs114 instead of Rs.144.
(d) Commission of Rs.250 paid, was posted twice, once to discount
account and once to Commission account.
(e) A sale of Rs.169 to Rama Murthy though correctly entered in sales
book, was posted wrongly to his account as Rs.196.
(f) A purchase from Neeraj of Rs.290 though correctly entered in
purchases book was wrongly debited to his personal account.
You are required to
1. Pass the necessary rectifying entries
2. Prepare Suspense account
3. State the effect of each of the rectification on the profit.
What would be the correct profit originally arrived at was Rs.10000?
4. The trial balance of Raj Bahadur of Vijayanagaram as on 31-12-2005 is

given below.Prepare Trading Account, Profit and Loss Account and
Balance Sheet for year ending 31-12-2005 after taking into
consideration the following adjustments.
(a) Stock on 31-12-2005 was 15000
(b) Debts worth Rs.2000 should be written off as bad
(c) Depreciate Machinery by 5% and Motor Van by 15%
(d) Reserve for bad and doubtful debts should be increased by Rs.600
(e) Commission accrued and not received Rs.500
(f) Goods worthRs.500 were used by the proprietor for his personal
use
(g) On September,2005, a fire broke out in the shop and goods worth
Rs.2000 were completely destroyed. The insurance company
accepted a claim of Rs.1500 only and paid the amount on January
1st 2006.
Page No.: 169

TRIAL BALANCE AS ON 31-12-2005

Particulars Debit in Rs Credit in Rs
Capital 85000
Drawings 7500
Opening Stock 12000
Purchases and Sales 86000 170000
Returns 2000 1000
Discounts 500 700
Commission 1000
Income Tax paid 700
Office Salaries 17300
Advertising 2000
Sundry Debtors and creditors 1700
Reserve for Doubtful Debts 85000 30000
Manufacturing Wages 8600 3000
Bills Receivable and Payable 5000
Carriage 600 5000
Machinery 40000
Motor Vans 7000
Land and Buildings 10000
Office Expenses 1500
Cash at Bank 6000
Cash in Hand 2300
295700 295700
Ans: Gross Profit Rs.79300; Net Profit: 52350; BS163650
Page No.: 170

5. On 31st December,2003 the following trial balance has been extracted.

Rs Rs
Drawings 4000 Establishment 9100
Sundry Debtors 20500 Rent, rates and insurance 5000
Interest on loan 300 Advertisement 4160
Cash in hand 4000 Credit Balances
Stock (1-1-2003) 6050 Capital account 50000
Motor Vehicles 10000 Sundry creditors 12000
Cash at Bank 5600 Loan on mortgage 15700
Land and buildings 62000 Bad debts Provision 2000
Purchases 97500 Sales 170000
Salaries 8600 Purchase returns 1460
Carriage in 4100 Discounts 500
Carriage out 2200 Bills payable 3000
General Expenses 5100 Rent received 600
Bills receivable 7050
Adjustments
1. Depreciate land and buildings at 5% and Motor Vehicles at 15%
2. Interest on loan is at 5% taken on 1st January,2003
3. Salaries amounting to Rs.700 and Rates amounting to Rs.400 are due.
4. There has been a fire on 1st January, 2003 destroying goods worth
Rs.200
5. The bad debts provision is to be brought up to 5% on Sundry debtors
6. The stock in hand on 31-12-2003 was valued at Rs16000
7. Goods costing Rs.1000 were taken away by the proprietor for his
personal use, but no entry has been made in the books of accounts
8. Prepaid insurance amounted to Rs.500
9. Provide for Manager’s commission at 5% on net profit after charging
such commission.
Prepare Trading & P&L a/c and balance sheet.
Page No.: 171

6. A firm had the following Balances on 1st January 2000

(a) Provision for bad debts Rs7500
(b) Provision for discount on debtors 3600
(c) Provision for discount on creditors 3000
During the year Bad debts amounted to Rs.6000, Discounts allowed

were Rs300 and discounts received were Rs.600. During 2001, bad
debts amounted to Rs.5000 and discounts allowed and received were
respectively Rs.6000 and Rs1500.
Total debtors on December 1st, 2000 were Rs.1,44,000 before writing off
of bad debts, but after allowing discounts. On December 31st, 2000, the
amount of debtors was Rs.57000 after writing off the bad debts but
before allowing discounts. Total creditors on these two dates were
Rs.60000 and Rs.75000 respectively.
It is the firm’s policy to maintain a provision of 5% against bad and

doubtful debts and 3 % for discount on debtors and a provision of 3% for
discount on creditors.
Show the accounts relating to provision on Debtors and provision on

creditors for the year 2000 and 2001 (Ans: Provision for bad debts-2000
Rs.6900 and 2001 Rs.2850; Provision for discount on debtors – 2000
Rs.3933, 2001 Rs.1530; Provision for discount on creditors – 2000
Rs.1800, 2001 Rs2250)
7. In a business, Sundry debtors were Rs.40000 at the beginning of the

year and there was 5% Reserve for Doubtful Debts and also
5%Rreserve for Discount on Debtors. During the year the actual bad
debts amounted to Rs.1600 and the discount allowed were Rs.1700. At
the close of the year, the debtors were Rs.50000; and the percentage of
the two reserves have to be maintained as at beginning. Show ledger
accounts.
Page No.: 172
Answer for Self Assessment Questions.

1. True
2. False
3. True
4. True
5. Internal transactions
6. profit / loss for the accounting period
7. True
1. Outstanding expenses
2. Salaries account Dr To outstanding expenses account
3. It means t hat they are already considered.
4. False.

1. Prepaid expenses
2. True
3. 1000 + 5600 – 800 = 5800
4. True.

1. Accrued or outstanding income
2. True
3. True

1. True
2. Rent account Dr
To Income received in advance account
3. Deducted.
Page No.: 173


1. Wear & tear / usage
2. Depreciation a/c Dr
To asset account
3. P & L a/c Dr
To Depreciation a/c
4. It means that the concerned asset is get to be depreciated
5. Diminishing(Reducing) balance method.
6. It indicates that the asset is already depreciated and depreciation should
be transferred only to P & L a/c.

1. Bad debts
2. True
3. Bad debts a/c Dr
To Debtor a/c
4. P & L a/c Dr
To Bad debts a/c
5. Profits are reduced.
6. Cash a/c Dr.
To Bad-debts recovered a/c.

1. Bad debts are totally not recoverable, doubtful debts may be recovered.
2. False
3. True
4. True
5. R.B.D a/c Dr
To bad debts account.
6. P & L a/c Dr
To R BD a/c
7. True
Page No.: 174


1. To encourage customers to make quick & prompt payment.
2. Cash discount a/c Dr
To Debtors a/c
3. True
4. True
5. Good debtors (Meaning total debtors- Bad debts outside trial balance-
RBD )

1. True
2. True
3. Deduct the provision from the amount of creditors
4. True.
1. Cost on market price which ever is lower
2. Closing stock is debited and trading account is credited
3. Gross profit is reduced by not considering unsold stock
4. True.

1. True
2. True
3. Sales
4. P & L

1. Net purchases meaning (Total purchases – purchase returns – stock
destroyed – stock used for personal use ).
2. No, because they do not manufacture any product.
Page No.: 175


1. Indirect expenses office & administrative expenses, selling & distribution
expenses etc.
2. True
3. False
4. True

1. Assets, liabilities
2. True
3. True

1. To write off bad debts against the reserve and reduce the pressure on
current profits.
2. to provide for anticipated profits.
3. Rs 2000 relating to 5 months ( 1.8.2000 to 31.12.2000)
4. i) a ii) c iii) c iv) b v) c
5. Yes
6. No
7. Yes
8. No
Answer for Terminal Question:

1. Refer to unit 6.10.
4. Refer to unit 7.4, 7.6, 7.8.
Ans: Gross profit Rs 79300, Net profit Rs 52350
Balance sheet Rs 163650.
Page No.: 176

5. Refer to unit 7.4, 7.6 & 7.8

Gross Profit Rs 81010; Net Profit Rs 40706; Commission Rs 2034;
Balance Sheet Total Rs 1,20,025
6. Refer to unit 7.2.7, 7.2.8, 7.2.9

Answer : Provision for Bad debts 2000 – Rs 6900 ; 2001 – Rs 2850.
Provision for discount on debtors 2000 – Rs 3933; 2001- Rs 1530
Provision for discount on creditors 2000 – Rs 1800; 2001 –Rs 2,250.
7. Refer to unit 7.2.7, 7.2.8

Closing Balance of RBD Rs 2,500
Closing Balance of Reserve for Discount on Debtors Rs 2,375.
RBD Transferred to P & L account Rs 2,100
Reserve for Discount Transferred to P & L account Rs 2,175
Page No.: 177

Financial Accounting Part 7

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Financial Accounting Part 7

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Financial and Management Accounting Unit 7

Unit 7 Final Accounts

2. To incorporate such transactions left out and various adjustments with

Page No.: 135

7.1 Final Accounts – Introduction

Page No.: 136

7.2 Adjustments before preparing final accounts

If the accrual basis of accounting is used, adjusting entries are required at

Page No.: 137

Self Assessment Questions 1:

7.2.1 Outstanding expenses

Page No.: 138

payable in the next year is called outstanding expenses. To record that

Self Assessment Questions 2:

Page No.: 139

Self Assessment Questions 3:

7.2.3 Accrued Income

Outstanding incomes account Dr

Outstanding Income account appears as an asset in the balance sheet.

Self Assessment Questions 4:

Page No.: 140

7.2.4 Income received in advance

Concerned item of income account Dr

Rent received account Dr 12000

Self Assessment Questions 5:

There are two popular methods of depreciation, namely fixed installment

Depreciation account Dr 40,000

Self Assessment Questions 6:

2. What entry is drawn if depreciation is provided ?

Page No.: 142

3. When depreciation account is transferred to P & L A/c , what entry do

4. If depreciation to be provided in the adjustments, what do you

5. What is the method of depreciation recognized by Indian Income Tax

6. If depreciation appears in the trial balance, what does it indicate ?

7.2.6 Bad Debts

Page No.: 143

Self Assessment Questions 7:

7.2.7 Provision for Doubtful Debts

Page No.: 144

Profit and Loss Account Dr

N - O + B = 18000 – 15000 + 4000 = 7000

Self Assessment Questions 8:

6. If RBD is freshly to be provided, what entry can be draw?

Page No.: 146

Bad debts Reserve account Dr

Reserve for Bad Debts Account

Page No.: 147

7.2.8 Reserve for Discount on debtors:

Profit and Loss Account Dr

To Provision for discount on debtors account

Page No.: 148

3. If provision for discount on debtors exists at the time of providing

Self Assessment Questions 9:

Page No.: 149

Dec 31st P & L Account Dr

Page No.: 150

2. The amount debited to P&L Account towards Reserve for Discount on

Bad Debts Account

Reserve for Bad Debts Account

Page No.: 151

Discount on Debtors Account

Dr Reserve for Discount on Debtors Account Cr

7.2.9 Reserve for discount on creditors