Book 10 Account Final for 2077_new

5 TRIAL BALANCE Chapter Learning Objectives After studying this chapter, the readers will be able to :  write the meaning of trial balance,  state the objectives and advantages of trial balance,  mention the procedures of preparing trial balance,  prepare a trial balance after preparation of ledger accounts or from the given ledger balances,  describe the accounting errors on the basis of disclosure by trial balance,  describe the concept of adjustment and closing of trial balance by opening suspense account. Introduction When all the transactions are posted into different ledger accounts, it is necessary to know whether they are recorded and posted accurately or not. In order to ensure the correctness in recording and posting, a statement is prepared which is known as trial balance. While recording the transactions in primary books or posting them into various ledgers, there may be errors or frauds committed knowingly or unknowingly. If such errors remain in the books of account, finally it affects the net result of business operation. Due to this reason too, the journal and ledgers should be checked to make correction in the arithmetical records by preparing a statement which is termed as trial balance. It is the third step of accounting process. Trial Balance 101

Concept and definition Trial balance is the list of debit and credit balances or even the total of the ledger accounts prepared at the particular date. If a trial balance is prepared on the basis of ledger balances, all debit balances should be transferred into the debit column and credit balances should be transferred into the credit column. The debit total and credit total should be equal to each other. If debit and credit total remains equal, it is called agreement of trial balance. But, if the debit total and credit total is found different, it is assumed that there may be arithmetical errors in preparing the journal and the ledgers. The following are the definitions of trial balance: “A trial balance is a statement prepared with the debit and credit balances of ledger accounts to test arithmetical accuracy of books.” J. R. Batliboi “A trial balance is the list of debit and credit balance taken out from ledger; it also includes the balance of cash and bank taken from cash book.” R. N. Carter “A trial balance is a statement of the debit and credit balances of the various ledger accounts which is prepared to check their arithmetical accuracy.” A.N. Agrawal Trial balance is a statement of debit and credit balances or totals of ledger accounts which is prepared at the particular date in order to prove the arithmetical accuracy of the books of account. Objectives of preparing a trial balance The following are the main objectives of preparing trial balance: a. To check the arithmetical accuracy M emory Tips The main objective of preparing a trial balance  To check the arithmetical accuracy is to check arithmetical accuracy of books of  To locate and rectify the errors and account. It gathers the debit and credit balances of all ledger accounts at a place and checks frauds whether the debit total equals to credit total or  To provide summary of all the ledger not. If the debit total is not equal to the credit total, it indicates that there may be some errors accounts existed in the books of account.  To facilitate the preparation of final accounts  To help in evaluation and decision making b. To locate and rectify the errors and frauds The trial balance also helps to find out the errors and to correct them in time. The disagreement in trial balance i.e. difference in debit and credit total indicates the arithmetical errors in maintaining the books of accounts. Thus, it helps to identify them and correct in time. 102 Office Management and Accountancy

c. To provide summary of all the ledger accounts As all the ledger balances are listed in a separate sheet of paper under a trial balance, it provides the information about all ledger accounts. Thus, to provide summarized information about ledger accounts is also another objective of a trial balance. d. To facilitate the preparation of final accounts Final accounts are prepared at the end of an accounting period to know the true financial position. Such accounts are prepared on the basis of a trial balance. It provides summary of personal, real and nominal accounts. Thus, to assist for the preparation of final accounts is the next objective of a trial balance. e. To help in evaluation and decision making The trial balance provides the information about assets, liabilities, expenses, income etc for a certain period. The trial balance drawn in different time periods helps the management for evaluation and decision making process on different business matters. Advantages of a trial balance Following are the main advantages of a trial balance:  It helps to check the arithmetical accuracy of recording and posting of financial transactions.  It helps to locate and rectify the accounting errors and frauds.  It helps to provide a summary of all the ledger accounts of the firm.  It facilitates for preparation of final accounts.  It helps in making evaluation and decision on various business matters.  It supports for internal audit by providing complete, reliable and accurate accounting information. Specimen of a trial balance Following is a general specimen of a trial balance: Trial Balance of ….. As on …….. S.N. Particulars L.F. Debit Rs. Credit Rs. 1 2 34 5 Trial Balance 103

In the above specimen, the following information are to be mentioned: 1. S. No The serial number of accounts likes 1, 2, 3, 4... is mentioned in this column. 2. Particulars The name of different ledger accounts like cash account, capital account etc is mentioned in this column. 3. Ledger Folio (L.F.) The page number of various ledger accounts from where they have been taken is mentioned in this column. 4. Debit Rs. The amount of the debit balance of the ledger account is written in this column. 5. Credit Rs. The amount of the credit balance of the ledger account is written in this column. Procedures for preparing a trial balance Following are the procedures to be followed in preparation of a trial balance:  The specimen of trial balance should be prepared.  Name of the organization and the date of preparing trial balance should be mentioned at the middle top.  The serial numbers like 1, 2, 3, 4 .......... etc should be mentioned in first column as per the number of ledger accounts.  The name of ledger accounts like cash, capital, interest etc should be mentioned in the second column.  The page number of each ledger account should be written in third column.  The amount of ledger accounts having debit balance should be posted in debit column and the amount of ledger accounts having credit balance should be posted in credit column.  If only the ledger balances are given, the following rules should be applied to post the amount either in debit or credit side of a trial balance: a. Dr. all assets, expenses and losses b. Cr. all liabilities, capital, income and gains  Finally, the debit and credit sides should be totalled to ensure the correctness in recording and posting which must be equal.  If the debit and credit sides are not found equal, the difference should be transferred to suspense account assuming some arithmetical errors. Later on, they should be located and rectified. Ill-1 The following transactions are given to you: July 1 Business started with cash Rs. 1,50,000 July 3 Opened bank account with Rs. 1,00,000 July 12 Purchased goods for cash Rs. 40,000 July 18 Paid wages Rs. 10,000 by cheque. July 26 Sold goods to Ramila for Rs. 50,000 104 Office Management and Accountancy

Required: a) Journal entries b) Ledger accounts c) Trial balance as on 31st July a) Journal Entries Date Particulars L.F. Debit Rs. Credit Rs. July 1 Cash a/c . .................................................................................... Dr. 1,50,000 To Capital a/c (Being business started with cash) 1,50,000 July 3 Bank a/c ...................................................................................... Dr. 1,00,000 To Cash a/c (Being bank account opened) 1,00,000 July 12 Purchase a/c ............................................................................... Dr. 40,000 To Cash a/c (Being goods purchased in cash) 40,000 July 18 Wages a/c ................................................................................... Dr. 10,000 To Bank a/c (Being wages paid by cheque) 10,000 July 26 Ramila’s a/c ................................................................................ Dr. 50,000 To Sales a/c (Being goods sold to Ramila on credit) 50,000 b) Ledger accounts Dr. Cash Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount July 1 To Capital a/c................. 1,50,000 July 3 By Bank a/c..................... 1,00,000 July 12 By Purchase a/c ............. 40,000 July 31 By Balance c/d................. 10,000 Aug. 1 To Balance b/d............... 1,50,000 1,50,000 10,000 Dr. Capital Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount July 31 1,50,000 July 1 By Cash a/c................... 1,50,000 To Balance c/d..................... 1,50,000 1,50,000 Aug. 1 By Balance b/d.............. 1,50,000 Dr. Bank Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 1,00,000 July 3 To Cash a/c...................... July 18 By Wages a/c.By Balance 10,000 1,00,000 July 31 c/d.................................... 90,000 90,000 1,00,000 Aug. 1 To Balance b/d................. Trial Balance 105

Dr. Purchase Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount July 12 To Cash a/c....................... To Balance b/d.................. 40,000 July 31 By Balance c/d.................. 40,000 Aug. 1 40,000 40,000 Particulars Dr. To Bank a/c....................... 40,000 Date To Balance b/d.................. Wages Account Cr. July 18 J.F. Amount Date Particulars J.F. Amount Aug. 1 10,000 July 31 By Balance c/d................. 10,000 10,000 10,000 10,000 Dr. Ramila’s Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount July 26 To Sales a/c..................... 50,000 July 31 By Balance c/d.................. 50,000 Aug. 1 To Balance b/d................. 50,000 50,000 50,000 Dr. Sales Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount July 31 To Balance c/d..................... 50,000 July 26 By Ramila’s a/c.............. 50,000 50,000 50,000 Aug. 1 By Balance b/d.............. 50,000 c) Trial Balance As on 31st July S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Cash a/c ........................................................................................................ 10,000 – 2. Capital a/c ...................................................................................................... – 1,50,000 3. Bank a/c ......................................................................................................... 4. Purchase a/c .................................................................................................. 90,000 – 5. Wages a/c ...................................................................................................... 40,000 – 6. Ramila’s a/c ................................................................................................... 10,000 – 7. Sales a/c ........................................................................................................ 50,000 – 50,000 Total................................................................................................................ 2,00,000 2,00,000 Preparation of a trial balance from the given ledger balances A trial balance is prepared on the basis of ledger balances drawn from the various ledger accounts. The following rules should be followed for debiting and crediting the items in trial balance:  All assets, expenses and losses are debited  All liabilities, capital, incomes and gains are credited 106 Office Management and Accountancy

The following is the list of possible items to be debited and credited in a trial balance: Trial Balance of ........... As on ……. S. Particulars L.F. Debit Rs. Credit Rs. No. ××× 1. Cash balance .................................................................................. ××× ××× 2. Bank balance .................................................................................. ××× ××× 3. Sundry debtors ............................................................................... ××× ××× 4. Investment ...................................................................................... ××× ××× 5. Bills receivable ................................................................................ ××× ××× 6. Accounts receivable ....................................................................... ××× ××× 7. Land and building ........................................................................... ××× ××× 8. Plant and machinery ....................................................................... ××× ××× 9. Furniture and fixture ....................................................................... ××× ××× 10. Vehicles .......................................................................................... ××× ××× 11. Loose tools ..................................................................................... ××× ××× 12. Goodwill ......................................................................................... ××× ××× 13. Patent ............................................................................................. ××× ××× 14. Trademark ...................................................................................... ××× ××× 15. Copy right ....................................................................................... ××× ××× 16. Prepaid expenses ........................................................................... ××× ××× 17. Accrued income .............................................................................. ××× ××× 18. Loan given ...................................................................................... ××× ××× 19. Business premises ......................................................................... 20. Opening stock ................................................................................. 21. Purchase ........................................................................................ 22. Sales return .................................................................................... 23. Carriage/freight inward ................................................................... 24. Carriage/freight outward ................................................................. 25. Purchase expenses ....................................................................... 26. Import and export duty .................................................................... 27. Wages and salaries ........................................................................ 28. Factory expenses ........................................................................... 29. Insurance premium ......................................................................... 30. Rent, rates and tax ......................................................................... 31. Office and administrative expenses ................................................ 32. Interest paid .................................................................................... 33. Commission paid ............................................................................ 34. Advertisement ................................................................................. 35. Heating and lighting charges........................................................... 36. Communication charges.................................................................. 37. Printing and stationery expenses ................................................... Trial Balance 107

38. Repairs and maintenance ............................................................... ××× 39. Depreciation.................................................................................... ××× 40. Fuel, coal and coke ........................................................................ ××× 41. Legal expenses .............................................................................. ××× 42. Establishment expenses ................................................................. ××× 43. Charity and donation ...................................................................... ××× 44. Bank charges .................................................................................. ××× 45. Discount allowed ............................................................................ ××× 46. Drawing .......................................................................................... ××× 47. Bad debts ....................................................................................... ××× 48. Loss on sale of assets .................................................................... ××× 49. Entertainment expenses ................................................................. ××× 50. General expenses .......................................................................... ××× 51. Delivery van expenses ................................................................... ××× 52. Value added tax .............................................................................. ××× 53. Capital ............................................................................................ 54. Sundry creditors ............................................................................. ××× 55. Bank overdraft ................................................................................ ××× 56. General reserve .............................................................................. ××× 57. Reserve fund .................................................................................. ××× 58. Bills payable ................................................................................... ××× 59. Accounts payable ........................................................................... ××× 60. Loan received ................................................................................. ××× 61. Outstanding expenses .................................................................... ××× 62. Advance income ............................................................................. ××× 63. Capital reserve ............................................................................... ××× 64. Deposit from customers .................................................................. ××× 65. Purchase return ....................................................................... ××× 66. Commission received ..................................................................... ××× 67. Discount received ........................................................................... ××× 68. Interest received ............................................................................. ××× 69. Bad debts recovered ...................................................................... ××× 70. Provision for bad debts ................................................................... ××× 71. Apprentice premium ....................................................................... ××× 72. Interest on investment .................................................................... ××× 73. Gain on sale of assets .................................................................... ××× 74. Rent received ................................................................................. ××× 75. Sale of scrap ................................................................................... ××× 76. Miscellaneous income ................................................................... ××× 77. Sales ....................................................................................... ××× ××× Total................................................................................................. ××× ××× 108 Office Management and Accountancy

Ill-2 The following are the ledger balances taken from the books of Anupama on 31st Chaitra 2074. Opening stock ...................... Rs. 10,000 Sundry creditors......... Rs. 40,000 Purchases............................... 90,000 Wages............................ 20,000 Sales........................................ Commission received. 5,000 Purchase return..................... 2,00,000 Bank balance................ 9,000 Sales return............................ 5,000 Salary............................ 15,000 Sundry debtors...................... 7,000 Furniture ..................... Capital.................................... 50,000 1,49,000 1,00,000 Required: Trial balance as on 31st Chaitra, 2074 Solution: Trial Balance of Anupama As on 31st Chaitra, 2074 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Opening stock ................................................................................................ 2. Purchases ...................................................................................................... 10,000 – 3. Sales .............................................................................................................. 4. Purchase return ............................................................................................. 90,000 – 5. Sales return ................................................................................................... 6. Sundry debtors .............................................................................................. 2,00,000 7. Sundry creditors ............................................................................................ 8. Wages ........................................................................................................... 5,000 9. Salary ............................................................................................................ 10. Commission received .................................................................................... 7,000 – 11. Bank balance ................................................................................................. 12. Furniture ........................................................................................................ 50,000 13. Capital ........................................................................................................... Total................................................................................................................ – 40,000 20,000 – 15,000 – – 5,000 9,000 – 1,49,000 – – 1,00,000 3,50,000 3,50,000 Adjustment and closing in a trial balance A trial balance is a basis for preparation of final accounts. It provides summary of all the ledger accounts drawn in a business firm. It should have equal amount in both the debit and the credit columns. But sometimes due to any error, it may not be equal in both columns. In such situation, the errors should be detected and rectified in time. However sometimes, errors cannot be located easily in spite of hard efforts of concerned staff. Due to which, a trial balance does not tally. On the other hand, it causes delay in preparation of final accounts. Thus, to avoid such delay, a trial balance is made equal by adding the balance amount in lighter side which is known Trial Balance 109

as adjustment and closing of trial balance. Thus, in case of disagreement in trial balance, it is made equal by putting the difference amount in any of the sides i.e. debit or credit. In order to put the difference amount, an artificial account is used till the location and rectification of errors which is called suspense account. It is a temporary solution adopted to make the trial balance equal. When all the errors affecting the trial balance are detected and rectified, the suspense account is automatically disposed off. The following are some of the errors that causes disagreement in a trial balance:  Posting of amount in wrong side of an account.  Posting of wrong amount in one side of an account.  Omission of posting in one side of an account.  Wrong totaling and balancing of ledger account.  Double posting in one account.  Posting in wrong side of the trial balance.  Omission of transferring balance of any account in the trial balance. Short Notes to Remember (SNR 5.1)  Suspense account is an artificial account opened temporarily for the purpose of adjusting and closing the trial balance until the errors are located and rectified.  If the debit total of the trial balance is more than its credit total, suspense account is opened in credit side by writing the difference amount.  If the credit total of the trial balance is more than its debit total, suspense account is opened in debit side by writing the difference amount.  After all the errors are located and rectified, the suspense account automatically disappears from the books of account  Adjustment and closing of trial balance is an artificial process of making the trial balance equal by opening suspense account in lighter side to avoid delay in preparation of final accounts. Ill-3 The following are the balances of ledger accounts taken from the books of Shalimar Concern on 31st Ashadh, 2074: Opening stock.......................................... Rs. 60,000 Drawing...................................... Rs. 2,500 Purchase................................................. 1,20,000 Sales return................................ 1,800 Sundry debtors........................................ 55,000 Purchase return.......................... 2500 Capital .................................................... 1,70,000 Sundry creditors......................... 27,600 Cash balance........................................... 45,000 General reserve.......................... 15,000 Loan from bank........................................ 8,000 Salaries and wages.................... 12,500 Sales........................................................ 1,00,000 Interest received......................... 4,500 Repairs and maintenance........................ 6,800 Furniture..................................... 24,000 110 Office Management and Accountancy

Required: Trial balance Solution: Trial Balance of Shalimar Concern As on 31st Ashadh, 2074 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Opening stock............................................................................................. 60,000 – 2. Purchases................................................................................................... 1,20,000 – 3. Sundry debtors........................................................................................... – 4. Capital........................................................................................................ 55,000 1,70,000 5. Cash balance.............................................................................................. – – 6. Loan from bank........................................................................................... 8,000 7. Sales........................................................................................................... 45,000 1,00,000 8. Repairs and maintenance........................................................................... – – 9. Drawing...................................................................................................... – – 10. Sales return................................................................................................ – 11. Purchase return.......................................................................................... 6,800 2,500 12. Sundry creditors......................................................................................... 2,500 27,600 13. General reserve.......................................................................................... 1,800 15,000 14. Salaries and wages.................................................................................... – 15. Interest received......................................................................................... – 4,500 16. Furniture..................................................................................................... – – Total............................................................................................................ – 3,27,600 12,500 – 24,000 3,27,600 Ill-4 Forpoemn the following balances of ledger accounts, draw a trial balance and suspense account, if needed: Building..................................................... Rs. 1,90,000 Capital.................................................... Rs. 2,00,000 Advance income....................................... 14,000 Loan to Kreeti......................................... 30,000 Sales......................................................... 80,000 Bank overdraft........................................ 10,000 Purchase.................................................. 75,000 Cash in hand.......................................... 17,000 Commission paid...................................... 9,000 Closing stock.......................................... 12,000 Solution: Trial Balance As on ……. S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Building..................................................................................................... 2. Advance income....................................................................................... 1,90,000 – 3. Sales......................................................................................................... 4. Purchase.................................................................................................. – 14,000 5. Commission paid...................................................................................... 6. Capital...................................................................................................... – 80,000 7. Loan to Kreeti........................................................................................... 8. Bank overdraft.......................................................................................... 75,000 – 9. Cash in hand............................................................................................ 10. Closing stock............................................................................................ 9,000 – 11. Suspense account(Balancing figure)........................................................ Total.......................................................................................................... – 2,00,000 30,000 – – 10,000 17,000 – 12,000 – – 29,000 3,33,000 3,33,000 Trial Balance 111

ACCOUNTING ERRORS Concept and definition A number of errors may take place in the process of recording and posting the financial transactions in the books of account. Such errors may be committed by the accounting staff knowingly or unknowingly. Thus, errors may take place due to lack of proper accounting knowledge or carelessness. Sometimes, the errors may take place due to bad intention of the staff and frauds in expectation of receiving undue benefit. Whatever the reason and mistake, all types of errors are called accounting errors. Some errors affect the agreement of trial balance whereas some errors do not affect the agreement of a trial balance. It means in spite of agreement of trial balance, there may be some errors in the books of account. All types of accounting errors should be located and rectified on time. Accounting errors are the errors committed in recording, posting or summarizing the transactions due to lack of accounting knowledge or carelessness or bad intention of the staffs. Types of accounting errors Accounting errors can be classified under different bases. On the basis of disclosure by trial balance, it may be classified as follows: Figure: 5.1 Types of accounting errors Accounting errors Errors disclosed by Errors not disclosed the trial balance by the trial balance Errors disclosed by the trial balance The accounting errors which cause the disagreement of the trial balance are known as the errors disclosed by the trial balance. Following are the errors which are disclosed by the trial balance: a. Posting of amount in wrong side of an account While posting the amount on ledger account, it should be posted on right side of an account. If amount is posted on wrong side, it causes the disagreement in the 112 Office Management and Accountancy

trial balance. For example, if goods purchased from Sneha on credit Rs. 10,000 is wrongly posted on debit side of Sneha’s account instead of credit side, it makes Sneha’s account excess by Rs. 20,000 and thus affects the total of the trial balance. b. Posting of wrong amount in one side of an account While posting the transactions from primary books to ledger account, if wrong amount Memory Tips is posted in one side of an account, the trial balance does not agree. For example, if salary  Posting of amount in wrong side of an paid to Nisha Rs. 10,000 is wrongly debited to account salary account as Rs. 1,000 but credited to cash account correctly by Rs. 10,000. Then, salary  Posting of wrong amount in one side of account remains less by Rs. 9,000 in debit side. an account This type of error causes the disagreement in a trial balance.  Omission of posting in one side of an account c. Omission of posting in one side of an account  Wrong totalling or balancing of ledger account  Double posting in one account  Posting on wrong side of a trial balance  Omission of transferring ledger  balance in the trial balance  Wrong totalling of subsidiary book Sometimes, the transaction may be posted in one account and wrongly omitted in another account. In such case, only one aspect of transaction is considered and thus a trial balance will not be equal. For example, if cash received as interest Rs. 5,000 is debited to cash account but omitted to post on the credit side of interest account, it will have less amount in credit side of interest account by Rs. 5,000. As a result, a trial balance is also affected by Rs. 5,000 being less in credit side. d. Wrong totalling or balancing of ledger account While making the total of any ledger account, it should be done correctly. Similarly, the balance of any account should also be determined accurately. If any account is wrongly totalled or balanced, it would cause the disagreement in the trial balance. For example, if the totals of cash account Rs. 94,500 is wrongly written as Rs. 95,400, It causes a wrong balance in account by Rs. 900 more. As a result, the trial balance shows the difference amount on the debit and the credit side. e. Double posting in one account Sometimes, the posting may be done twice on the debit or credit side of any ledger account. It affects the total of the trial balance and cause more amount in account where the double posting is made. For example, salary paid Rs. 3,000 is posted twice on the debit side of salary account but correctly posted on the credit side of cash account. It causes the disagreement of trial balance. f. Posting on wrong side of a trial balance Sometimes, balance of any ledger account may be transferred on the wrong side of the trial balance. It makes the trial balance unequal. For example, if the debit Trial Balance 113

balance of purchase account is transferred on the credit side or the credit balance of sales account is transferred on the debit side of the trial balance. In both or any of the situations, the trial balance does not tally. g. Omission of transferring ledger balance in the trial balance Sometimes, any ledger balance may be forgotten to transfer in the trial balance. It causes the disagreement in it. For example, if rent account having debit balance Rs. 6,000 is omitted to transfer in the trial balance, it will have difference equal to that amount. h. Wrong totalling of subsidiary book Sometimes, the subsidiary book may be wrongly totalled by more or less amount. It affects the concerned ledger account and makes disagreement. For example, if purchase book is wrongly totalled as Rs. 54,000 instead of Rs. 45,000, then the purchase account will be higher by Rs. 9,000 on the debit side and affects the total of trial balance. Errors not disclosed by the trial balance The agreement of trial balance is not a conclusive proof of accuracy of books of account. Because there are some errors which do not affect the agreement of the trial balance. Following are some errors which are not disclosed by a trial balance: a. Errors of complete omission When any transaction is not recorded at all M Tin the primary books or not posted in the emory ips ledger account, it is called error of complete  Errors of complete omission omission. Such error completely ignores the  Errors of commission  Errors of principle dual aspects i.e. debit and credit in journals  Compensating errors and ledger accounts. As a result, a trial  Errors of double posting balance is affected by the equal amount and causes agreement. For example, purchase of goods is not recorded in journal and thus not posted into ledger accounts. Due to this error, neither the purchase account is debited nor the cash account is credited. It affects the trial balance with equal amount and causes agreement. Thus, such an error is not disclosed by a trial balance. The accounting error which occurs due to not recording of transaction in primary books i.e. journal or subsidiary book is called error of complete omission. b. Errors of commission When any transaction is recorded but wrongly entered in the primary books or in the ledger account, it is called errors of commission. Such errors occur when wrong amount is recorded in journal or wrongly posted in both sides of the 114 Office Management and Accountancy

ledger account. For example, if the purchase of goods from Ranjita Rs. 10,000 is journalized by Rs. 1,000 and posted accordingly in both the purchase account and Ranjita’s account. In this case, both sides are affected by equal amount so that the trial balance remains agreed. The accounting error which occurs due to wrong recording of the transaction either by wrong amount or in wrong account is called error of commission. c. Errors of principle The errors which are committed by an accountant due to lack of proper knowledge on application of accounting principles are called errors of principle. Such errors may take place when the fundamental principles of accounting are violated by the accounting staff. Such errors also occur due to wrong allocation of expenditures between capital and revenue. For example, if the purchase of machinery is debited to purchase account instead of machinery account, if sale of furniture is credited to sales account instead of furniture account etc. Similarly, if payment of salary is debited to personal account and receipt of income is credited to personal account instead of nominal head etc. Such errors also do not affect the agreement of trial balance. The accounting error which occurs due to violation of accounting principles for recording the transaction is called error of principle. d. Compensating errors When the error committed previously is compensated or neutralised by another error committed later on, it is called compensating error. In such error, the first error is cancelled by the second error with equal amount. Compensating errors do not affect the agreement of the trial balance. For example, cash paid to Manju Rs. 3,000 is debited to her account by Rs. 300, and again cash paid to Minu Rs. 300 is debited to her account by Rs. 3,000. Though there are errors in both the transactions, the first error of posting less amount Rs. 2,700 was compensated by the posting of more amount i.e. Rs. 2,700 in the second error. Thus, the effect of error is zero. Similarly, if commission allowed Rs. 1,500 is recorded as Rs.3,500 and again discount received Rs. 2,500 is recorded as Rs. 4,500 such errors do not affect the agreement of trial balance. The accounting errors on which one effect is cancelled or neutralised by another effect is called compensating error. e. Errors of double posting When any transaction is recorded or posted twice in primary books or ledger account, it is known as error of double posting. It affects the both sides of the trial balance with equal amount and thus does not affect the agreement of it. For example, purchase of goods from Sony for Rs. 5,000 is posted twice in purchase Trial Balance 115

book or ledger account. It causes the trial balance equal as the affect will be equal in both the sides. The accounting error which occurs due to recording the transaction twice in books of account is called error of double posting. REVIEW ILLUSTRATIONS Ill-5 The following are the business transactions of Shree Ganesh Enterprises for the month of January 2018: January 1 Business started with cash Rs. 6,40,000 January 3 Opened a bank account with cash Rs. 5,00,000 January 7 Purchased goods for cash Rs. 45,000 January 13 Sold goods for Rs. 35,000 January 19 Bought goods from Ajay Rs. 75,000 January 25 Paid wages in cash Rs. 15,000 January 27 Paid salary by cheque Rs. 50,000 January 28 Sold goods to Abha on credit for Rs. 50,000 January 30 Cash deposited into bank Rs. 25,000 January 31 Bought a computer for Rs. 30,000 and paid by cheque. Required: a) Journal entries b) Ledger accounts c) Trial balance as on 31st January, 2018 Solution: a) Journal Entries Date Particulars L.F. Debit Rs. Credit Rs. January 1 6,40,000 6,40,000 Cash a/c........................................................................................ Dr. January 3 To Capital a/c 5,00,000 (Being business started with cash) 5,00,000 January 7 Bank a/c......................................................................................... Dr. 45,000 January 13 To Cash a/c (Being a bank account opened) 45,000 Purchase a/c.................................................................................. Dr. 35,000 To Cash a/c (Being goods purchased for cash) 35,000 Cash a/c ...................................................................................... Dr. To Sales a/c (Being goods sold for cash) 116 Office Management and Accountancy

January 19 Purchase a/c.................................................................................. Dr. 75,000 To Ajay’s a/c (Being goods purchased from Ajaya) 75,000 January 25 Wages a/c .................................................................................... Dr. 15,000 To Cash a/c (Being wages paid) 15,000 January 27 Salary a/c ..................................................................................... Dr. 50,000 To Bank a/c (Being salary paid by cheque) 50,000 January 28 Abha a/c ...................................................................................... Dr. 50,000 To Sales a/c (Being goods sold to Abha) 50,000 January 30 Bank a/c ....................................................................................... Dr. 25,000 To Cash a/c (Being cash deposited into bank) 25,000 January 31 Computer a/c ............................................................................... Dr. 30,000 To Bank a/c (Being computer bought and paid through cheque) 30,000 b) Ledger accounts Capital Account Cr. Dr. J.F. Amount Date Particulars J.F. Amount Date Particulars Jan. 31 To Balance c/d................ 6,40,000 Jan. 1 By Cash a/c........................ 6,40,000 6,40,000 Feb. 1 By Balance b/d................... 6,40,000 6,40,000 Dr. Cash Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Jan. 1 Amount Jan. 13 To Capital a/c.............. 6,40,000 Jan. 3 By Bank a/c......................... 5,00,000 To Sales a/c................ 35,000 Jan. 7 By Purchase a/c.................. Jan. By Wages a/c...................... 45,000 6,75,000 By Bank a/c......................... 15,000 90,000 25 By Balance c/d..................... 25,000 Jan. 90,000 Feb. 1 To Balance b/d............ 30 6,75,000 Jan 31 Cr. Dr. Bank Account Amount Date Particulars J.F. Amount Date Particulars J.F. 50,000 Jan. 3 30,000 Jan. 30 To Cash a/c................... 5,00,000 Jan. 27 By Salary a/c...................... 4,45,000 To Cash a/c................... 25,000 Jan. 31 By Computer a/c................. 5,25,000 Jan. 31 By Balance c/d.................... Feb. 1 To Balance b/d.............. 5,25,000 4,45,000 Trial Balance 117

Dr. Purchase Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount Jan. 7 Jan. 19 To Cash a/c................... 45,000 Jan. 31 By Balance c/d..................... 1,20,000 To Ajay’s a/c.................. 75,000 1,20,000 1,20,000 Feb. 1 To Balance b/d.............. 1,20,000 Cr. Dr. Sales Account Particulars Date To Balance c/d................ J.F. Amount Date Particulars J.F. Amount Jan. 31 85,000 Jan. 13 By Cash a/c...................... 35,000 Jan. 28 By Abha a/c...................... 50,000 85,000 85,000 Feb. 1 By Balance b/d................. 85,000 Dr. Ajay’s Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount Jan. 31 To Balance c/d................ 75,000 Jan. 19 By Purchase a/c................ 75,000 Dr. 75,000 75,000 Feb. 1 By Balance b/d.................. 75,000 Date Jan. 25 Wages Account Cr. Particulars J.F. Amount Date Particulars J.F. Amount To Cash a/c ................... 15,000 Jan. 31 By Balance c/d.................... 15,000 15,000 15,000 Feb. 1 To Balance b/d .............. 15,000 Dr. Salary Account Cr. Date Particulars Jan. 27 To Bank a/c.............. J.F. Amount Date Particulars J.F. Amount Feb. 1 To Balance b/d......... 50,000 Jan. 31 By Balance c/d.................... 50,000 Dr. 50,000 50,000 Date Particulars 50,000 Cr. Jan. 28 To Sales a/c........... Abha Account Feb. 1 To Balance b/d....... Dr. J.F. Amount Date Particulars J.F. Amount Date Particulars 50,000 Jan. 31 By Balance c/d.................... 50,000 Jan. 31 To Bank a/c........... 50,000 50,000 Feb. 1 To Balance b/d...... 50,000 Computer Account Cr. J.F. Amount Date Particulars J.F. Amount 30,000 Jan. 31 By Balance c/d................... 30,000 30,000 30,000 30,000 118 Office Management and Accountancy

(c) L.F. Debit Rs. Credit Trial Balance Rs. As on 31st January, 2018 6,40,000 S. No. Particulars 90,000 1. Capital a/c........................................................................................................ 2. Cash a/c.......................................................................................................... 1,20,000 3. Purchase a/c.................................................................................................... 4. Bank a/c........................................................................................................... 4,45,000 5. Sales a/c.......................................................................................................... 6. Ajay’s a/c......................................................................................................... 85,000 7. Wages a/c........................................................................................................ 8. Salary a/c......................................................................................................... 75,000 9. Abha’s a/c........................................................................................................ 10. Computer a/c................................................................................................... 15,000 Total................................................................................................................. 50,000 50,000 30,000 8,00,000 8,00,000 Ill-6 The following ledger balances are extracted from the books of Binayak Traders for the year ending 31st December, 2017: Cash................................................... Rs. 10,000 Purchases................................... Rs. 4,50,000 Sundry debtors................................... 2,80,000 Salary......................................... 55,000 Sundry creditors................................. 1,45,000 Office expenses.......................... 35,000 Land and building............................... 4,38,000 Advertisement............................. 57,000 Capital................................................ 6,00,000 Sales return................................ 10,000 Furniture and fixtures.......................... 2,50,000 Purchase return.......................... 5,000 Commission received ........................ 15,000 Carriage inward.......................... 40,000 Sales................................................... 8,90,000 Commission paid........................ 30,000 Required Trial balance Trial Balance of Binayak Traders Solution: As on 31st December, 2017 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Cash 10,000 2. Sundry debtors ......................................................................................... 3. Sundry creditors ....................................................................................... 2,80,000 4. Land and building ..................................................................................... 1,45,000 5. Capital ...................................................................................................... 6. Furniture and fixtures ............................................................................... 4,38,000 7. Commission received ............................................................................... 6,00,000 8. Sales ........................................................................................................ 9. Purchases ................................................................................................ 2,50,000 15,000 8,90,000 4,50,000 Trial Balance 119

10. Salary ....................................................................................................... 55,000 5,000 11. Office expenses ....................................................................................... 35,000 16,55,000 12. Advertisement .......................................................................................... 57,000 13. Sales return .............................................................................................. 10,000 14. Purchase return ........................................................................................ 15. Carriage inward ........................................................................................ 40,000 16. Commission paid ...................................................................................... 30,000 16,55, 000 Total .......................................................................................................... Ill-7 Prepare a trial balance from the given ledger balances of Durga Company as on 31st Ashadh, 2074: Opening stock........................................... Rs. 10,000 Accounts payable............................... Rs.70,000 Wages...................................................... 60,000 Rent, rates and taxes......................... 14,000 Purchases................................................. Plant and machinery........................... 95,000 Sales......................................................... 2,00,000 Vehicles.............................................. Capital...................................................... 5,00,000 Loan................................................... 1,25,000 Drawings................................................... 2,00,000 Import duty.......................................... 60,000 Carriage outward...................................... Factory expenses............................... 30,000 Bank balance............................................ 5,000 Interest paid........................................ 35,000 Investment................................................ 10,000 General reserve.................................. 12,000 Accounts receivable................................. 59,000 Interest on investment........................ 4,000 1,00,000 11,000 90,000 Solution: Trial Balance of Durga Company As on 31st Ashadh, 2074 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Opening stock.................................................................................................. 10,000 2. Wages............................................................................................................. 60,000 3. Purchases........................................................................................................ 4. Sales................................................................................................................ 2,00,000 5. Capital............................................................................................................. 5,00,000 6. Drawing........................................................................................................... 2,00,000 7. Carriage outward............................................................................................. 8. Bank balance................................................................................................... 5,000 9. Investment....................................................................................................... 10,000 10. Accounts receivable........................................................................................ 59,000 11. Accounts payable............................................................................................ 1,00,000 12. Rent, rates and taxes...................................................................................... 90,000 13. Plant and machinery........................................................................................ 14. Vehicles........................................................................................................... 70,000 15. Loan................................................................................................................ 14,000 16. Import duty....................................................................................................... 95,000 1,25,000 60,000 30,000 120 Office Management and Accountancy

17. Factory expenses............................................................................................ 35,000 4,000 18. Interest paid..................................................................................................... 12,000 11,000 19. General reserve.............................................................................................. 8,45,000 20. Interest on investment..................................................................................... 8,45,000 Total ............................................................................................................... Ill-8 3P1rsetpCahreaiatrtar,ia2l0b74a:lance from the given ledger balances of John Traders on Bills receivable............................................ Rs. 25,000 Bad debts........................................... Rs. 6,000 Goodwill...................................................... 1,00,000 Capital ............................................... 2,95,000 Copyright.................................................... 50,000 Bills payable....................................... Insurance premium..................................... 5,000 Bank overdraft.................................... 30,000 Office expenses.......................................... 37,000 Outstanding expenses........................ 42,000 Communication charge............................... 13,000 Bad debts recovered.......................... 7,000 Depreciation............................................... 10,000 Sales................................................... 3,000 Business premises..................................... 3,00,000 Purchases........................................... 4,00,000 Legal expenses.......................................... 15,000 Discount received............................... 2,10,000 Bank charge............................................... 2,000 Discount allowed................................ 8,000 12,000 Solution: Trial Balance of John Traders As on 31st Chaitra, 2074 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Bills receivable................................................................................................. 25,000 2. Goodwill........................................................................................................... 3. Copyright......................................................................................................... 1,00,000 4. Insurance premium.......................................................................................... 50,000 5. Office expenses............................................................................................... 5,000 6. Communication charges.................................................................................. 37,000 7. Depreciation.................................................................................................... 13,000 8. Business premises.......................................................................................... 10,000 9. Legal expenses............................................................................................... 10. Bank charges................................................................................................... 3,00,000 11. Bad debts........................................................................................................ 15,000 12. Bills payable.................................................................................................... 2,000 13. Capital............................................................................................................. 6,000 14. Bank overdraft................................................................................................. 30,000 15. Outstanding expenses..................................................................................... 2,95,000 16. Bad debts recovered....................................................................................... 42,000 17. Sales ............................................................................................................... 7,000 18. Purchases........................................................................................................ 3,000 19. Discount received............................................................................................ 4,00,000 20. Discount allowed............................................................................................ Total ........................................................................................................... 2,10,000 8,000 12,000 7,85,000 7,85,000 Trial Balance 121

Ill-9 Prepare a trial balance from the given ledger balances of Himalayan Trade Centre as on 30th June, 2017. Open suspense account, if needed: Patent right ................................................ Rs. 60,000 Capital.................................................... Rs. 2,25,000 38,000 Export duty................................................. 20,000 Reserve fund.......................................... 5,000 2,000 Administrative expenses............................. 30,000 Prepaid expenses................................... 14,000 1,000 Printing and stationery................................ 10,000 Provision for bad debts........................... 9,000 11,000 Repair and maintenance............................ 15,000 Rent received......................................... 2,00,000 Entertainment expenses............................. 25,000 Sales of scrap......................................... Purchases................................................... 2,50,000 Loss on sale of assets............................ General expenses...................................... 8,000 Accrued income...................................... Sales.......................................................... 4,00,000 Other assets........................................... Solution: Trial Balance of Himalayan Trade Centre As on 30th June 2017 S. No. Particulars L.F. Debit Rs. Credit Rs. 1. Patent right...................................................................................................... 60,000 2. Export duty...................................................................................................... 20,000 3. Administrative expenses.................................................................................. 30,000 4. Printing and stationery..................................................................................... 10,000 5. Repair and maintenance................................................................................. 15,000 6. Entertainment expenses.................................................................................. 25,000 7. Purchases........................................................................................................ 2,50,000 8. General expenses........................................................................................... 8,000 9. Sales................................................................................................................ 4,00,000 10. Capital............................................................................................................. 2,25,000 11. Reserve fund................................................................................................... 38,000 12. Prepaid expenses............................................................................................ 5,000 13. Provision for bad debts.................................................................................... 2,000 14. Rent received.................................................................................................. 14,000 15. Sale of scrap.................................................................................................... 1,000 16. Loss on sale of assets..................................................................................... 9,000 17. Accrued income............................................................................................... 11,000 18. Other assets.................................................................................................... 2,00,000 19. Suspense account (Balancing figure).............................................................. 37,000 Total ........................................................................................................... 6,80,000 6,80,000 122 Office Management and Accountancy

Key – errors committed unintentionally due lack of Terms – accounting knowledge or principles. – Accounting errors artificial process of equalising and closing the trial balance. Adjustment and closing error in which one error neutrilize the effect of Compensating error another in the books of account. Disagreement of trial balance – difference in debit and credit side of trial balance due to some accounting errors in recording and Error of commission – posting. Error of omission – error which occurs due to wrong recording of Error of principle – the transaction either by wrong amount or in wrong account. Final accounts – error which occurs due to absolute leaving of Frauds – recording the transaction in the books. error which occurs due to violation of accounting principles or prevalent provisions of law. summarized financial statements prepared to determine the operating results and true financial condition of the business. errors committed intentionally to take undue benefit. A. Very short answer questions 1. What is a trial balance? 2. Write any two items which are placed in debit column of the trial balance. 3. Write any two items which are placed in credit column of the trial balance. 4. What is meant by error of commission? 5. Give the meaning of compensating error. 6. What do you mean by error of omission? 7. Why is suspense account opened? 8. Write any two errors that are not revealed by a trial balance. Trial Balance 123

9. Give any two examples due to which the trial balance disagrees. 10. Give the meaning of error of principle. B. Short answer questions 1. What is a trial balance? Mention the objectives of preparing it. 2. Show the specimen of a trial balance and mention the information to be written in it. 3. What are the advantages of preparing a trial balance? State them. 4. Mention the procedures for preparing a trial balance. 5. What is meant by adjustment and closing in the trial balance? Explain its procedures. C. Long answer questions 1. What do you mean by accounting errors? Explain in brief the errors which are disclosed by a trial balance. 2. Describe with example about the errors which are not revealed by a trial balance. 3. “Agreement of a trial balance is not a conclusive proof for the arithmetical accuracy of the books of account.” Support this statement with any five arguments. PRACTICAL PROBLEMS(PP) PP-1 Following transactions are given to you: January 2 Ganesh started business with cash Rs. 3,00,000 January 5 Purchased goods in cash Rs. 40,000 January 10 Sold goods for Rs. 25,000 January 14 Cash deposited into bank Rs. 2,00,000 January 20 Purchased goods from Yogesh for Rs. 60,000 January 26 Paid rent by cheque Rs. 10,000 Required: a) Journal entries b) Necessary ledger accounts c) Trial balance as on 31st January Ans: b) Balance: Capital account Rs. 3,00,000, Cash account Rs. 85,000, Purchase account Rs. 1,00,000, Sales account Rs. 25,000, Bank account Rs. 1,90,000, Yogesh account Rs. 60,000, Rent account Rs. 10,000 c) Total Rs.3,85,000 124 Office Management and Accountancy

PP-2 The following are the transactions of Manakamana traders for the month of Shrawan 2074: Shrawan 1 Commenced business with bank balance Rs.4,00,000. Shrawan 2 Bought goods for Rs. 50,000 from John. Shrawan 9 Paid wages by cheque Rs. 20,000. Shrawan 17 Sold goods in cash Rs. 45,000. Shrawan 25 Withdrawn cash Rs. 40,000 from bank for office use. Shrawan 28 Purchased goods for cash Rs. 30,000. Required: a) Journal entries b) Necessary ledger accounts c) Trial balance as on 30th Shrawan 2074 Ans: b) Balance: Capital account Rs. 4,00,000, Purchase account Rs. 80,000, John account Rs. 50,000, Wages account Rs. 20,000, Bank account Rs. 3,40,000, Sales account Rs. 45,000, Cash account Rs. 55,000, c) Total Rs. 4,95,000 PP-3 The following ledger balances are extracted from the books of Everest Enterprises as on 31st Chaitra, 2074: Capital........................................................ Rs. 1,75,000 Sundry debtors................................... Rs. 95,000 Purchases................................................... 2,15,000 Sundry creditors................................. 80,000 Sales........................................................... 4,70,000 Machinery........................................... Sales return................................................ 10,000 Cash in hand...................................... 1,39,000 Purchase return.......................................... 15,000 Land and building............................... 8,000 Salary......................................................... 40,000 Cash at bank...................................... Rent............................................................ 50,000 Bank loan............................................ 2,60,000 23,000 1,00,000 Required: Trial balance as on 31st Chaitra, 2074 Ans: Total Rs. 8,40,000 PP-4 The following list of balances has been extracted from the books of Aabha as on 31st December 2017: Purchases................................................... Rs.1,80,000 Rent and rates........................................ Rs. 45,000 Sales........................................................... 4,13,000 Office expenses...................................... 38,000 Capital........................................................ 3,00,000 Creditors................................................. 70,000 Purchase return.......................................... 5,000 Bank loan................................................ 60,000 Sales return................................................ 3,000 Cash at bank.......................................... 82,000 Plant and machinery................................... 2,95,000 Commission allowed............................... 20,000 Computer and equipment .......................... 1,10,000 Debtors................................................. 75,000 Required: Trial balance as on 31st December, 2017 Ans: Total Rs. 8,48,000 Trial Balance 125

PP-5 Prepare a trial balance from the given ledger balances on 31st Ashadh 2017: Opening stock............................................. Rs. 25,000 Investment........................................... Rs. 99,000 Sales........................................................... 4,00,000 Cash and bank balance.Administrative 78,000 Purchases................................................... 1,90,000 expenses............................................. 40,000 Wages........................................................ 30,000 Loan from friends................................. 50,000 Office equipment........................................ 90,000 Advertisement ..................................... 35,000 Accounts receivable................................... 1,85,000 Capital................................................. 2,60,000 Accounts payable....................................... 80,000 Carriage............................................. 18,000 Ans: Total Rs. 7,90,000 PP-6 The following ledger balances of Nepal Trade Centre are provided to you: Commission allowed................................... Rs. 10,000 Accounts receivable ........................... Rs. 40,000 Discount received....................................... 8,000 Capital........................................................ Interest on loan.................................... 6,000 Loan........................................................... 1,00,000 Wages........................................................ 56,000 Accounts payable................................ 49,000 Freight........................................................ 30,000 Custom duty............................................... 15,000 Vehicles............................................... 1,45,000 Bills receivable............................................ 13,000 29,000 Loose tools.......................................... 11,000 Required: Trial balance Opening stock...................................... 19,000 Purchases............................................ 1,80,000 Sales.................................................. 2,85,000 Ans: Total Rs. 4,98,000 PP-7 The following ledger balances are extracted from the books of Sujan Trade Concern as on 31st December, 2017: Opening inventory...................................... Rs. 26,000 Carriage outward................................ Rs. 17,000 Capital........................................................ 2,25,000 Sales................................................... 5,00,000 Drawing...................................................... 5,000 Purchases........................................... 3,00,000 Commission received................................. 10,000 Insurance premium............................. 19,000 Discount allowed........................................ 13,000 Bills payable....................................... 24,000 Miscellaneous Income................................ 6,000 Legal expenses.................................. 15,000 Goodwill...................................................... 50,000 Bank overdraft.................................... 40,000 Business premises..................................... 3,40,000 Printing and stationery........................ 20,000 Required: Trial balance as on 31st December 2017 Ans: Total Rs. 8,05,000 PP-8 The following are the ledger accounts balances taken from the books of Durga Trade Concern on 30th June, 2016: Bank balance.............................................. Rs. 61,000 Rent, rates and taxes.......................... Rs. 51,000 Trade mark................................................. 1,00,000 Sales.................................................... 2,95,000 Prepaid expenses....................................... 10,000 Telephone charges.............................. 18,000 Outstanding expenses................................ 20,000 Repair and maintenance..................... 22,000 Loan given.................................................. 50,000 Business premises.............................. 1,41,000 Purchases................................................... 1,00,000 Bank charges....................................... 4,000 Import duty.................................................. 25,000 Capital................................................. 3,10,000 Wages and salary....................................... 30,000 Drawing............................................. 13,000 Required: Trial balance Ans: Total Rs. 6,25,000 126 Office Management and Accountancy

PP-9 The following ledger balances as on 31st Chaitra 2074 are available: Capital........................................................ Rs. 3,10,000 Purchases ......................................... Rs. 2,13,000 Bad debts................................................... 5,000 General reserve................................... 23,000 Advertisement............................................. Entertainment expenses...................... 19,000 Bad debt recovered.................................... 1,60,000 Bank overdraft..................................... 30,000 Furniture..................................................... 3,000 Prepaid expenses................................ 8,000 Outstanding expenses................................ Advance income.................................. 16,000 Sales........................................................... 3,26,000 Repair and maintenance..................... 22,000 Depreciation............................................... 10,000 Sundry expenses............................... 19,000 Required: Trial balance 4,00,000 20,000 Ans: Total Rs. 7,92,000 PP-10 The following ledger balances are extracted from the book of Mamata Company as on 31st Ashadh, 2074: Leasehold property..................................... Rs. 1,20,000 Goodwill ............................................. Rs. 25,000 Accounts receivable................................... 20,000 Import duty.......................................... 10,000 Entertainment expenses ............................ 5,000 Capital................................................ Drawings..................................................... 4,000 Reserve fund...................................... 1,50,000 Advance service income............................. 48,000 Accrued interest on investment ......... 20,000 Bank overdraft............................................ 12,000 Investment.......................................... 6,000 Carriage outward........................................ 9,000 Royalty ............................................... 40,000 Accounts payable....................................... 17,000 Rent received..................................... 11,000 3,000 Required : Trial balance Ans: Total Rs. 2,50,000 PP-11 The following balances of ledger accounts are extracted from the books of a trader as on 31st December 2017: Salary and wages....................................... Rs. 60,000 Printing expenses................................ Rs. 44,000 Capital........................................................ 3,00,000 Plant and machinery............................ 3,64,000 Purchases................................................... 2,00,000 Discount allowed................................. 26,000 Sales........................................................... 5,00,000 Prepaid printing expenses................... 7,000 Accrued income.......................................... 15,000 Bad debts............................................ 4,000 Provision for bad debts............................... 5,000 Bills receivable..................................... 90,000 Outstanding salary...................................... 13,000 Beginning inventory............................. 50,000 Unearned income.................................. 2,000 Bills payable........................................ 40,000 Required: Trial balance as on 31st December, 2017 Ans: Total Rs. 8,60,000 Trial Balance 127

PP-12 The following are the business transactions of John Enterprises for the month of Chaitra 2074: Opening stock............................................. Rs. 40,000 General expenses............................... Rs. 58,000 Bank balance.............................................. 34,000 Investment........................................... 1,00,000 Accrued commission.................................. 5,000 Sales.................................................... 4,25,000 Unearned commission................................ 10,000 Interest received.................................. 13,000 Capital........................................................ Creditors.............................................. 59,000 Loan from Prime Bank................................ 3,50,000 Debtors................................................ 78,000 Purchases................................................... 1,00,000 Land and building................................ 3,50,000 Carriage inward.......................................... 2,00,000 Depreciation...................................... 14,000 50,000 Required: Trial balance as on 31st Chaitra, 2074, open suspense account if needed. Ans: Total Rs. 9,57,000, Suspense account Rs. 28,000 PP-13 Prepare a trial balance of Sunflower Trading Concern, Balaju as on 31st Chaitra 2074, from the following ledger balances: Stock on 1st Baishakh................................ Rs.60,000 Suppliers.............................................. Rs. 12,000 Capital........................................................ 2,70,000 Bad debts............................................ 8,000 Motor car.................................................... 2,00,000 Repairs and maintenance.................... 14,000 Purchases................................................... 2,30,000 Bankers............................................... 24,000 Sales revenue............................................. 2,50,000 Hari a/c (Dr)......................................... 30,000 Carriage outward........................................ 10,000 General reserve................................... 40,000 Customers.................................................. 75,000 Advance income................................ 4,000 Ans: Total Rs. 6,27,000, Suspense account` (Cr.) Rs. 27,000  128 Office Management and Accountancy

6 FINAL ACCOUNTS Chapter Learning Objectives After studying this chapter, the readers will be able to :  define final accounts and mention their objectives,  define trading account and state its objectives,  define profit and loss account and state its objectives,  calculate the gross profit or gross loss of the business firm by preparing a trading account,  calculate the net profit or net loss of the business firm by preparing a profit and loss account,  define balance sheet and state its advantages to the firm,  prepare a balance sheet from the items of assets and liabilities. Introduction Every business firm would like to know its profit or loss and financial position at the end of accounting period. In order to know the gross profit or gross loss and net profit or net loss, it has to prepare the trading account and profit and loss account respectively. At the particular date, the balance sheet is prepared to know the true financial position of the business firm. The combined form of trading account, profit and loss account and balance sheet is known as final accounts. Thus, final accounts refer to the combination of trading account, profit and loss account and balance sheet which are prepared at the end of year to know the profit or loss and true financial position. The preparation of final account is the last step of accounting process. The trading account and profit and loss account show the operating results of business by recording trading and operating activities of the firm respectively. On the other hand, balance sheet provides information relating to capital, assets and liabilities of the business firm at the end of accounting period. Final Accounts 129

Concept and definition Final account is the final step of accounting process. It is the combined form of trading, profit and loss account and balance sheet of the business firm. Trading account is prepared to calculate the amount of gross profit or gross loss of a firm during a period. Profit and loss account determines the net operating results of the firm at the end of accounting period. Balance sheet is the statement of financial position relating to the business firm. It discloses the position of assets, liabilities and capital of the firm at the particular date. Thus, final accounts include trading, profit and loss account and balance sheet. Trading and profit and loss account is colletively known as income statement. Some of the popular definitions of final accounts are given below: “Final account is the account which is prepared at the end of a given year period to see the profit and loss position as well as the financial position of a going concern for the period given.” S. Mukharjee “Final accounts are the means of communication of the financial position and performance of a business enterprise to its various user groups.” Ghos, Banerjee and Bansal Final accounts are the statements prepared at the end of accounting period to determine the operating result and financial condition of the business firm at the particular date. Objectives of final accounts The major objectives of final accounts are given below:  To determine the trading and operating results of the business firm during the period.  To ascertain the true financial position of the business i.e. capital, assets and liabilities at the particular date.  To maintain the effective control over financial resources of the business firm.  To facilitate for formulation of various business plans and policies.  To communicate the business results and performance to the various users of the firm.  To prepare the accounting summary of financial transactions relating to the business firm. Short Notes to Remember (SNR 6.1)  Final account is the final step of accounting process which is prepared at the end of accounting period.  It is prepared to know the profit or loss and financial position of the business firm at the particular date.  It comprises the trading account, profit and loss account and balance sheet. 130 Office Management and Accountancy

Preparation of final accounts The parts and preparation of final accounts of a business firm is explained below: a) Trading account b) Profit and loss account c) Balance sheet Trading account Trading account is the first step of final account. It is prepared by the business firm to determine the gross profit or gross loss at the end of accounting period. It shows all the direct expenses relating to purchase and manufacture of the finished goods in debit side and direct income relating to sales and closing stock to the credit side . Thus, the business firm at the end of accounting period needs to know its gross profit or loss resulted from the business operation by preparing a trading account. If the credit side is higher than debit side, it is termed as gross profit and if the debit side is higher than credit, the result is termed as gross loss. Trading account is an account prepared at the end of accounting period to determine the gross profit or gross loss of the business firm at the particular date. Advantages of trading account The trading account has the following advantages:  It provides information about the gross profit or gross loss of the business firm during a period.  It helps to know about the purchase and sales of the firm during a year.  It helps to measure the operating efficiency of the business firm.  It helps to calculate the ratio between direct expenses and gross profit.  It helps to know about total direct expenses and direct incomes of the firm during the year.  It helps to calculate the ratio between gross profit and net sales of the firm.  It helps to perform the comparative study of income and expenditure during the period.  It facilitates the preparation of profit and loss account. Short Notes to Remember (SNR 6.2)  Direct expenses refer to the expenses related to purchase of materials and other manufacturing costs.  Direct income means the amount of sales revenue and closing stock of the business. Final Accounts 131

Specimen of trading account The specimen of trading account is as follows: Dr. Trading Account of ................... Cr. For the year ending ……………. Amount Particulars Amount Particulars ××× To Opening stock.............................................. ××× By Sales ................................................... ××× ××× To Purchase............................................... ××× Less: Sales return ..................................... ××× ××× Less: Purchase return............................... ××× ××× By Closing stock .............................................. To Carriage inward........................................... ××× By Gross loss c/d (if any)................................. ××× To Freight inward.............................................. ××× To Custom / Import duty................................... ××× To Octroi charge .............................................. ××× To Manufacturing wages................................... ××× To Royalty......................................................... ××× To Dock charges............................................... ××× To Clearing charges.......................................... ××× To Factory rent and insurance.......................... ××× To Factory heating and lighting......................... ××× To Coal and coal............................................... ××× To Fuel, gas and water..................................... ××× To Excise duty.................................................. ××× To Store consumed........................................... ××× To Motive power............................................... ××× To Coolie and cartage....................................... ××× To Other direct and factory expenses............... ××× To Gross profit c/d (if any)............................... ××× ××× Items included in trading account The trading account is prepared in the form of ledger account. Thus, it contains the debit and credit side. The items included in the debit and credit side of trading account are as follows: Items relating to debit side The trading account includes the following items in its debit side: a. Opening stock The stock of goods remained unsold at the end of previous accounting period and available at the opening day of this year is called opening stock. Hence, the 132 Office Management and Accountancy

closing stock of previous year is considered as the opening stock of current year. In the beginning year of the business, there will be no opening stock. b. Purchases Purchases mean the total of cash purchase and credit purchase of goods for resale purpose or further process during the year. It does not include the purchases other than resale goods. The amount of purchase return is deducted from the total purchase to show the net amount of purchase. c. Purchase related expenses Purchase related expenses are those expenses which are incurred in the transit while purchasing or buying the goods. Such expenses are debited to profit and loss account before determination of gross profit or gross loss. Carriage inward, freight inward, import duty, custom duty, octroi, coolie and cartage, clearing charges, dock charges etc. are some of the examples of purchase related expenses. d. Factory or manufacturing or productive expenses All the expenses which are incurred inside the factory for the manufacture or production of goods are called manufacturing or productive expenses. Those expenses are incurred in the process of converting the raw materials into finished product. Factory rent and insurance, factory heating and lighting supervisor’s salary, motive power, wages, coal, coke and gas, consumable stores, excise duty, royalties, primary packing and other factory expenses are the examples of manufacturing or productive expenses. Items relating to credit side The trading account includes the following items in its credit side: a. Sales Sales are the sources of revenue of the business firm. It includes the total of both the cash sales and credit sales of goods which are meant for resale purpose. In order to know the net amount of sales, sales return is deducted from sales and credited in trading account. b. Closing stock Closing stock is the value of goods, remained unsold in the business at the end of accounting period. It should be valued at cost price or market price which ever is less. Closing stock is treated as assets and shown in balance sheet if it is given outside of trial balance. Closing stock appeared in trial balance is not credited in trading account and shown only in balance sheet. Procedures of preparing trading account Following are the procedures of preparing trading account:  It is prepared in the form of ledger account and thus it contains two sides debit and credit. Final Accounts 133

 It is treated as nominal account and all the losses and expenses are debited and all gains and incomes are credited.  The items related to direct expenses such as opening stock, net purchase, purchase related expenses, wages and other manufacturing expenses should be debited.  The items related to direct income like net sales and closing stock should be credited.  The gross profit or gross loss should be determined by comparing the debit total and credit total.  The balancing figure appearing in debit side is termed as gross profit under the word “To gross profit c/d” and the balancing figure appearing in credit side is termed as gross loss under the word “By gross loss c/d”.  After the determination of gross profit or gross loss, it should be closed by drawing two parallel lines. Ill-1 The following items are extracted from the Supriya & Brothers Company for the year ended 31st December, 2017: Opening stock.................................................. Rs.65,000 Manufacturing expenses........................................ Rs.24,500 Purchases........................................................ 2,80,000 Sales return............................................................ 5,000 Carriage on purchase...................................... 14,500 Purchase return...................................................... 10,000 Import duties.................................................... 7,500 Factory rent and insurance.................................... 28,750 Sales ............................................................... 4,75,000 Coal and coke......................................................... 9,800 Productive wages............................................ 40,200 Store consumed .................................................... 18,500 Excise duty...................................................... 12,200 Stock on 31st December....................................... 90,000 Coolie and cartage ......................................... 13,000 Cr Required: Trading account Amount Solution: Trading Account of Supriya & Brothers Company 4,70,000 Dr For the year ended 31st December, 2017 90,000 Particulars Amount Particulars 5,60,000 To Opening stock ...................................... 65,000 By Sales ...................................... 4,75,000 To Purchases .............................. 2,80,000 Less: Sales return ............................ 5,000 Less: Purchase return ................... 10,000 2,70,000 By Closing stock........................................ To Carriage on purchase........................... 14,500 To Import duties......................................... 7,500 To Productive wages ................................ 40,200 To Excise duty........................................... 12,200 To Coolie and cartage................................ 13,000 To Manufacturing expenses....................... 24,500 To Factory rent and insurance .................. 28,750 To Coal and coke....................................... 9,800 To Store consumed.................................... 18,500 To Gross profit c/d.................................... 56,050 5,60,000 134 Office Management and Accountancy

Profit and loss account Profit and loss account is the second step of final account. It is prepared to determine the net profit or net loss of the business firm at the end of year. After the determination of gross profit or gross loss by trading account, again net profit or net loss is determined from the profit and loss account. The gross profit obtained from the trading account is transferred in the credit side of profit and loss account. Similarly, the gross loss obtained from trading account is shown in the debit side. All the indirect expenses are shown in debit side and indirect incomes are posted in credit side. The result obtained from this account is called net profit or net loss. If the credit side is higher than debit side, it is termed as net profit and if the debit side is higher than credit side, it is termed as net loss. The result obtained from the profit and loss account i.e. net profit or net loss is transferred to the balance sheet. Profit and loss account is an account prepared at the end of accounting period to determine the net profit or net loss of the business firm during a year. Advantages of profit and loss account Profit and loss account has the following advantages:  It provides information about the net profit or net loss of the business firm during the year.  It helps to measure the operational efficiency of the business firm.  It helps to calculate the ratio between total indirect expenses and net profit.  It helps to know about total indirect expenses and indirect incomes of the firm during the year.  It helps to calculate the ratio between gross profit and net profit of the firm.  It helps to perform the comparative study of income and expenditure during the period.  It facilitates for the preparation of balance sheet. Short Notes to Remember (SNR 6.3)  Indirect expenses refer to office and administrative expenses, selling and distribution expenses, business  operating expenses and other financial expenses etc.  Indirect income refers to all other incomes of the business firm except sales revenue of the firm.. Final Accounts 135

Specimen of profit and loss account The specimen of profit and loss account is as follows: Profit and Loss Account of ................... Cr. Dr. For the year ending ……………. Amount Particulars Amount Particulars ××× ××× To Gross loss b/d............................................. ××× By Gross profit b/d........................................... ××× To Salary and wages....................................... ××× By Rent received ............................................ ××× To Rent, rates and taxes.................................. ××× By Commission received ................................ ××× To Printing and stationeries............................. ××× By Interest received ........................................ ××× To Postage and telegram................................. ××× By Dividend received....................................... ××× To Communication charges............................. ××× By Discount received....................................... ××× To Insurance premium .................................... ××× By Compensation received ............................. ××× To Legal charges............................................. ××× By Income from investment............................. ××× To Audit fees ................................................... ××× By Bad debts recovered.................................. ××× To Bank charges.............................................. ××× By Gain on sale of fixed assets ...................... ××× ××× By Gain on sale of investment......................... ××× To Interest on loan .......................................... ××× By Apprenticeship premium............................. ××× To Free sample distribution............................. ××× By Sale of scrap.............................................. ××× To Establishment charges............................... ××× By Miscellaneous receipts............................... To Carriage on sales........................................ ××× By Net loss c/d (Transferred to capital)........... ××× To Warehouse expenses ................................ ××× To Advertisement and publicity........................ ××× To Salesman commission................................ ××× To General expenses....................................... ××× To Discount allowed......................................... ××× To Donation and charities................................ ××× To Office and administrative expenses ........... ××× To Selling and distribution expenses............... ××× To Refreshment expenses .............................. ××× To Entertainment expenses ............................ ××× To Sales tax (value added tax)........................ ××× To Trade expenses.......................................... ××× To Repair and maintenance............................. ××× To Depreciation on fixed assets....................... ××× To Bad debts.................................................... ××× To Delivery van expenses................................ ××× To Loss on sale of fixed assets........................ ××× To Travelling expenses.................................... ××× To Other indirect expenses.............................. ××× To Net profit c/d (Transferred to capital).......... ××× 136 Office Management and Accountancy

Items included in profit and loss account The profit and loss account is prepared in the form of ledger account. Thus, it contains the debit and credit side. The items included in the debit and credit side of profit and loss account are as follows: Items relating to debit side The profit and loss account includes the following items in its debit side: a. Office and administrative expenses All the expenses which are incurred for running the office are called office and administrative expenses. Those expenses include office salary, rent, insurance, audit fee, printing and stationery, postage and telegram, water and electricity, communication charges, office lighting and heating, employee bonus, welfare expenses etc. b. Selling and distribution expenses All the expenses which are incurred to promote the sales and distribute the finished goods to different geographical locations are called selling and distribution expenses. Such expenses include salesman salary and commission, advertisement, carriage outward, publicity, travelling expenses, warehouse rent, packing on sales, free sample distribution, delivery van expenses, commission to agents, export duty, sales tax etc. c. Financial expenses All those expenses which are incurred for the supply and use of finance in the business are called financial expenses. Such expenses include interest on loan, interest on overdraft, interest on capital, bank charge, discount allowed etc. d. Other miscellaneous expenses and losses All the expenses and losses which do not come under any of the above heads are included in this heading. Such expenses and losses are depreciation on fixed assets, repair and maintenance, bad debts, provision for bad and doubtful debts, loss of goods, loss on sale of fixed assets, provision for discount on debtors etc. Such items are debited in profit and loss account. Items relating to credit side The profit and loss account includes the following items in its credit side: a. Gross profit The gross profit obtained from trading account is credited to profit and loss account. b. Indirect incomes and gains All the indirect incomes and gains are credited in profit and loss account. Such incomes and gains include interest on investment, interest on deposit, discount Final Accounts 137

received, commission received, dividend received, bad debts recovered, rent earned, gain on sale of fixed assets, sale of scrap, compensation received, apprentice premium, miscellaneous receipts etc. Procedures of preparing profit and loss account Following are the procedures of preparing profit and loss account:  It is prepared in the form of ledger account and thus it contains two sides i.e. debit and credit.  It is treated as nominal account and all the losses and expenses are debited and all gains and incomes are credited.  The gross profit should be transferred to the credit side and gross loss should be transferred to the debit side.  All the indirect expenses and losses such as office and administrative expenses, selling and distribution expenses, financial expenses and other miscellaneous expenses and losses should be debited in profit and loss account.  All the items relating to indirect incomes and gains should be credited to profit and loss account.  The net profit or net loss of the business firm should be determined by comparing the total of debit side and credit side.  The balancing figure appearing in debit side is termed as net profit under the word “To net profit c/d” and the balancing figure appearing in credit side is termed as net loss under the word “By net loss c/d”.  After determination of net profit or net loss, it should be closed by drawing two parallel lines. Ill-2 The following ledger balances are taken from the books of Namaste Trading Concern on 31st Ashadh, 2074 : Gross profit .................................................. Rs.43,950 Discount received.............................................. Rs.4,800 Discount allowed .......................................... 3,400 Export duty........................................................ 4,250 Salary and wages ......................................... 18,500 Dividend received.............................................. 18,000 Trade expenses ............................................ 7,250 Entertainment expenses.................................... 4,000 Advertisement .............................................. 6,000 Carriage outward............................................... 3,500 Printing and stationery ................................. 12,000 Insurance premium............................................ 2,500 Rent received ............................................... 3,000 Depreciation on plant......................................... 6,000 Charity and donation .................................... 1,200 Interest received................................................ 12,500 General expenses ........................................ 1,850 Gain on sale of furniture.................................... 4,500 Salesmen commission ................................. 1,600 Compensation received..................................... 1,000 Miscellaneous income.................................. 11,500 Required: Profit and loss account 138 Office Management and Accountancy

Solution: Profit and Loss Account of Cr. Dr. Namaste Trading Concern For the year ending 31st Ashadh, 2074 Amount 43,950 Particulars Amount Particulars 4,800 18,000 To Discount allowed......................................... 3,400 By Gross profit................................................... 3,000 11,500 To Salary and wages ...................................... 18,500 By Discount received......................................... 12,500 4,500 To Trade expenses.......................................... 7,250 By Dividend received......................................... 1,000 To Advertisement............................................. 6,000 By Rent received............................................... 99,250 To Export duty.................................................. 4,250 By Miscellaneous income.................................. To Entertainment expenses............................. 4,000 By Interest received........................................... To Carriage outward........................................ 3,500 By Gain on sale of furniture............................... To Printing and stationery................................ 12,000 By Compensation received................................ To Charity and donation .................................. 1,200 To General expenses....................................... 1,850 To Salesmen commission................................ 1,600 To Insurance premium..................................... 2,500 To Depreciation on plant.................................. 6,000 To Net profit c/d............................................... 27,200 99,250 Combined specimen of trading and profit and loss account The combined specimen of trading account and profit and loss account for determination of gross profit or gross loss and net profit or net loss is as follows: Dr. Trading and Profit and Loss Account of ............... Cr. For the year ending ……………. Particulars Amount Amount Particulars ××× To Opening stock............................................. ××× By Sales ................................................... ××× ××× To Purchase .............................................. ××× Less: Sales return ..................................... ××× ××× Less: Purchase return............................... ××× To Carriage inward.......................................... ××× By Closing stock ............................................. To Freight inward............................................. ××× By Gross loss c/d (If any)............................... To Custom / Import duty.................................. ××× To Octroi charge ............................................. ××× ××× Final Accounts 139

To Manufacturing wages.................................. ××× ××× To Royalty........................................................ ××× ××× To Duck charges.............................................. ××× ××× To Clearing charges......................................... ××× ××× To Factory rent and insurance......................... ××× ××× To Factory heating and lighting........................ ××× ××× To Coal and coke............................................. ××× ××× To Fuel, gas and water.................................... ××× ××× To Excise duty................................................. ××× ××× To Store consumed.......................................... ××× ××× To Motive power.............................................. ××× ××× To Coolie and cartage...................................... ××× ××× To Other direct and factory expenses.............. ××× ××× To Gross profit c/d (If any)............................... ××× ××× ××× ××× To Gross loss b/d............................................. ××× By Gross profit b/d........................................... To Salary and wages....................................... ××× By Rent received ............................................ ××× To Rent, rates and taxes.................................. ××× By Commission received ................................ To Printing and stationeries............................. ××× By Interest received ........................................ To Postage and telegram................................. ××× By Dividend received....................................... To Communication charges............................. ××× By Discount received....................................... To Insurance premium .................................... ××× By Compensation received ............................. To Legal charges............................................. ××× By Income from investment............................. To Audit fees ................................................... ××× By Bad debts recovered.................................. To Bank charges.............................................. ××× By Gain on sale of fixed assets ...................... ××× By Gain on sale of investment........................ To Interest on loan .......................................... ××× By Apprenticeship premium............................. To Free sample distribution............................. ××× By Sale of scarp.............................................. To Establishment charges............................... ××× By Transfer fees received................................ To Carriage on sales........................................ ××× By Miscellaneous receipts............................... To Warehouse expenses ................................ 140 Office Management and Accountancy

To Advertisement and publicity........................ ××× By Net loss c/d (Transferred to capital)........... ××× To Salesman commission................................ ××× To General expenses....................................... ××× To Discount allowed......................................... ××× To Donation and charities................................ ××× To Office and administrative expenses ........... ××× To Selling and distribution expenses............... ××× To Refreshment expenses .............................. ××× To Entertainment expenses ............................ ××× To Sales tax..................................................... ××× To Trade expenses.......................................... ××× To Repair and maintenance............................. ××× To Depreciation on fixed assets....................... ××× To Bad debts.................................................... ××× To Delivery van expenses................................ ××× To Loss on sale of fixed assets........................ ××× To Travelling expenses.................................... ××× To Other indirect expenses.............................. ××× To Net profit c/d (Transferred to capital).......... ××× ××× ××× Ill-3 Prepare a trading and profit and loss account of Ram Lal Trading Concern for the year ended 31st Ashadh 2074 from the following particulars: Opening stock............................ Rs.42,000 Custom duty................................ Rs.2,400 Purchases.................................... 1,80,000 Closing stock............................... 48,000 Manufacturing wages............... 24,000 Sales.............................................. Carriage outward....................... 14,500 Sales return.................................. 2,98,500 Selling expenses......................... 6,000 Purchase return........................... 8,500 Audit fees.................................... 1,400 Salesman commission................ 2,500 Factory heating and lighting.... 6,500 Commission (Cr.)........................ 8,750 Bad debts..................................... 1,200 Coal, coke and fuel.................... 2,800 Communication charge............. 1,800 Carriage inward.......................... 4,000 3,500 Final Accounts 141

Solution: Trading and Profit and Loss Account of Cr. Dr. Ram Lal Trading Concern For the year ended 31st Ashadh, 2074 Particulars Amount Particulars Amount To Opening stock............................................. 42,000 By Sales............................................ 2,98,500 2,90,000 To Purchases..................................... 1,80,000 Less: Return........................................... 8,500 Less: Return........................................... 2,500 48,000 To Manufacturing wages ................................. 1,77,500 By Closing stock.............................................. To Factory heating and lighting ....................... 24,000 3,38,000 To Custom duty ............................................... 6,500 78,100 To Coal, Coke and fuel ................................... 2,400 2,800 To Carriage inward ......................................... 4,000 To Gross profit c/d .......................................... 3,500 80,900 78,100 To Carriage outward ....................................... To Selling expenses ........................................ 3,38,000 To Audit fees ................................................... 14,500 By Gross profit b/d .......................................... To Bad debts ................................................... 6,000 By Commission ............................................... To Communication charge .............................. 1,400 To Salesman commission ............................... 1,200 To Net profit c/d............................................... 1,800 8,750 .................................................................. 47,250 80,900 Differences between trading account and profit and loss account Following are the main differences between trading and profit and loss account: Basis of difference Trading account Profit and loss account 1. Meaning It is the account prepared by the It is the account prepared by the firm 2. Step firm to find out the gross result at to find out the net result at the end of 3. Purpose the end of year. year. 4. Recording It is the first step of final account. It is the second step of final account. It is prepared to know the gross It is prepared to know the net profit or profit or gross loss of the business net loss of the business at the particular at the particular date. date. It records the direct expenses It records the indirect expenses and and direct income of the business losses and indirect incomes of the firm firm during the period. during the period. 142 Office Management and Accountancy

5. Help It helps to prepare the profit and It helps to prepare the balance sheet. 6. Transfer of result loss account. The gross profit or gross loss The net profit is added to the capital obtained by this account is and the net loss is deducted from the transferred to the credit side capital in balance sheet. and debit side of profit and loss account respectively. Balance sheet Balance sheet is a statement of capital, liabilities and assets of the business firm prepared at the particular date. After the determination of net profit or net loss of the business firm, it is necessary to ascertain the true financial position at the particular date. The business firm prepares a statement at the end of year on the basis of ledger account balances for this purpose. It helps to determine the actual financial position of the business at the particular date. Balance sheet is not an account but a statement of capital and liabilities and assets and properties which discloses the financial condition of a firm. It is prepared on the basis of balances of personal and real accounts. The accounts showing debit balance represents assets and showing credit balance represents liabilities. Following are the major definitions of balance sheet: “Balance sheet is a statement prepared with a view to measure the exact financial position of a business on a certain date.” J.R. Batliboi “A balance sheet is a list of all the assets and all the liabilities of a business enterprise on a given date and shows its financial position on that date.” Dr. A.N Agrawala Balance sheet is a statement of capital, liabilities and assets of the business firm prepared to determine the true financial position at particular date. Advantages of balance sheet Balance sheet has the following advantages:  It presents the true financial position of a business in terms of assets liabilities and capital on a particular date.  It discloses the amount of trade debtors and trade creditors.  It shows the nature, value and position of all the assets and liabilities of the business.  It judges the liquidity and solvency position of the business.  It acts as an evidence for setting disputes and misunderstanding whenever required.  It provides information of net profit or net loss, closing capital and investment of the business firm.
 Final Accounts 143

 It helps in evaluating the strengths and weakness of the business.  It supplies reliable information regarding assets and liabilities for formulating plans and policies and making proper decision.  It facilitates in obtaining loan from financial institutions by reflecting the true financial position of the business.  It helps in determining the true value of the business at the time of sale or liquidation. Specimen of balance sheet Generally, the balance sheet is prepared at the last day of the accounting period. It is prepared after preparation of profit and loss account. It has two sides i.e. left hand side and right hand side. All the capital and liabilities are shown on the left hand side and all the assets items are shown on right hand side. The common specimen of a balance sheet is as follows: Balance Sheet …… As on ……………. Capital and liabilities Amount Assets Amount Goodwill........................................................... ××× Capital.......................................................××× ××× Patent and designs.......................................... ××× Add: Net profit ..........................................××× ××× Trademark....................................................... ××× ××× Copyright......................................................... ××× ××× ××× Software.......................................................... ××× Less: Net loss............................................××× ××× Land and building....................................... ××× Less: Drawing............................................××× ××× Plant and machinery................................... ××× ××× Furniture and fittings....................................... ××× General reserve.......................................... ××× Vehicles.......................................................... ××× Other reserve funds.................................... ××× Loose tools..................................................... ××× Investment...................................................... ××× Loans.............................................................. ××× Fixed deposit.................................................. ××× Loan given...................................................... ××× Sundry creditors............................................. Livestock......................................................... ××× Bills payable................................................... Preliminary expenses..................................... ××× Bank overdraft ............................................... Outstanding expenses.................................... Closing stock.................................................. ××× Advance income............................................. Sundry debtors............................................... ××× Bills receivable................................................ ××× Prepaid expenses........................................... ××× Accrued income.............................................. ××× Cash at bank.................................................. ××× Cash in hand.................................................. ××× ××× 144 Office Management and Accountancy

Short Notes to Remember (SNR 6.4)  Balance sheet helps to know the actual financial position of the business on a particular date.  If net loss is obtained from profit and loss account, it is deducted from the amount of capital in balance sheet.  The amount of drawings if any is always deducted from the capital as it reduces the amount of capital.  The items of assets and liabilities in a balance sheet can be arranged in two ways i.e. in order of liquidity and in order of permanency.  In above specimen of balance sheet, assets and liabilities have been arranged in order of permanency. If they are arranged in order of liquidity, it will be the reverse of the permanency order. Items included in a balance sheet The items to be included in the balance sheet are as follows: Items included in liabilities side A balance sheet contains the following items on its liabilities side: a. Capital Capital refers to the amount of cash or any kinds invested by the owner in the business at the time of establishment and operational period of business. It is the important source of funds for business. b. Net profit or net loss The excess amount of income over expenditure is known as net profit and the excess amount of expenditure over incomes is known as net loss. It is obtained from profit and loss account. The amount of net profit is added to the capital and net loss is deducted from the capital. c. Drawing Drawing is an amount withdrawn by the owner from the business in terms of cash or kind for his/her personal use. It reduces the amount of capital and thus deducted from the capital in balance sheet. d. Reserve and surplus Reserve is the amount set aside by the firm out of the profit for the year to meet future contingencies and losses. The business firm may create different types of funds for this purpose. Reserve fund, pension fund, depreciation fund, sinking fund, general reserve, contingency fund, dividend equalization fund etc. are some of the examples of reserve and surplus. e. Loan Loan is an amount borrowed from the individuals and financial institutions for various business purposes. The business firm should pay interest at certain rate on the loan borrowed. Loan may be short term or long term. Final Accounts 145

f. Creditors Creditors are the suppliers of trading goods purchased on credit to the business firms. They are the persons or parties to whom the business should pay against the goods bought on credit. It is short term liability of the business firm. g. Bills payable Bills payable is the amount payable to creditors for acceptance of bill drawn by him/her. It is a kind of promising in written form to pay the due amount of goods purchased on credit on certain date. It is a short term payable and generally paid within three months. h. Bank overdraft Bank overdraft is the facility provided by the bank to its accountholders to withdraw the amount of cash more than the bank deposit through cheque. For example, if the business firm has Rs.1,00,000 bank balance on a particular date and gets permission to withdraw Rs.1,20,000, the excess amount withdrawn Rs.20,000 is called bank overdraft. It is short term liability and should be repaid within three months. i. Outstanding expenses Those expenses which are expired but due for payment till the end of accounting period are called outstanding expenses. Such expenses are also called unpaid expenses or expenses payable. j. Advance income The incomes which are received in advance but not earned are called advance incomes. It is also called unearned income or pre-received income of the business. Items included in assets side A balance sheet contains the following items on its assets side: a. Fixed assets The assets and properties which are acquired by the business firm for long term use but not for resale purpose are called fixed assets. Fixed assets are also of following two types: i) Tangible fixed assets: Those fixed assets which have physical existence and can be seen and touched. are called tangible fixed assets Land and building, plant and machinery, furniture and fixtures, vehicles etc. are some examples of tangible fixed assets. ii) Intangible fixed assets: Intangible fixed assets are those assets which cannot be seen and touched. Such assets do not have any physical form. Goodwill, patent, trademark, copyright etc. are some of its examples. 146 Office Management and Accountancy

b. Current assets The assets and properties which are acquired by the business for a short term i.e. less than a year and which can be easily converted into cash are called current assets. These assets are also called floating or circulating assets because their value and form is frequently changeable. Following are some of the examples of current assets: i) Closing stock Closing stock refers to the value of resale or processing goods remained unsold or unused at the end of accounting period. ii) Debtors Debtors are the buyers of trading goods on credit from the business. They are the individuals or parties from whom the business should collect the amount against goods sold on credit. iii) Bills receivable Bills receivable is the amount receivable from debtors for drawing of bills and accepted by him/her. It is a kind of written promise made by the debtor to pay the due amount of goods sold on credit on certain date. iv) Accrued income Income earned in current accounting period but not yet received is called accrued income. It is receivables to the business and thus treated as assets. v) Prepaid expenses Any expenses which is not expired and paid in advance for future or next accounting year is called prepaid expenses. It is also called advance expenses or unexpired expenses and treated as assets of the business. vi) Cash at bank It refers to the balance of cash in the bank account of business on a particular date. vii) Cash in hand It refers to the balance of cash remained in the business at the end of accounting period. It also includes the petty cash fund balance and undeposited amount of cheque. c. Fictitious assets Those assets which do not have any real value and physical form are called fictitious assets. They are considered as assets only on legal and technical grounds. Such assets include preliminary expenses, discount on issue of share and debenture, loss on issue of share, developmental expenditures etc. Final Accounts 147

d. Investment The amount which is invested outside the business to earn additional income is called investment. The business firm may invest in share, debenture or any other government securities. e. Loan given The amount of loan provided by the business firm to any individual or institution is considered as an asset. The business receives interest on such loan provided. Ill-4 The following items are taken from the book of Mrs. Champa & Sons as on 31st Ashadh 2074 : Capital............................................ Rs.2,60,000 Loan provided..................................... Rs.12,000 Bank loan....................................... 75,000 Net profit.............................................. 56,000 Closing stock................................. 24,000 Prepaid salary...................................... 8,000 Land and building........................ Accrued income.................................. 6,800 Goodwill. ....................................... 1,40,000 Fixed deposit....................................... 18,000 Debtors........................................... 25,000 General reserve................................... 18,500 Drawing......................................... 14,000 Cash in hand........................................ 5,600 Loose tools..................................... 12,000 Cash at bank........................................ 12,500 Other reserve fund........................ 6,000 Motor car.............................................. Short term loan.............................. 36,000 Outstanding rent................................. 1,00,000 Investment in share...................... 40,000 Bills payable......................................... 10,000 Trademark...................................... 24,000 Creditors. ............................................. 16,000 Plant and machinery.................... 22,000 Furniture and fixtures........................ 12,500 Bank overdraft............................... 60,000 Advance income................................. 46,100 Bills receivable............................... 14,000 16,000 18,000 Required: Balance sheet Balance Sheet of Solution: Mrs. Champa & Sons As on 31st Ashadh, 2074 Capital and liabilities Amount Assets Amount Capital................................................2,60,000 Goodwill............................................................ 25,000 Add: Net profit ......................................56,000 Trademark........................................................ 22,000 . 3,16,000 Land and building............................................. 1,40,000 Less: Drawing........................................12,000 3,04,000 Plant and machinery......................................... 60,000 General reserve................................................ 18,500 Furniture and fixtures ....................................... 46,100 Other reserve fund............................................ 36,000 Motor car.......................................................... 1,00,000 Bank loan.......................................................... 75,000 Loose tools....................................................... 6,000 Short term loan................................................. 40,000 Investment in share.......................................... 24,000 Creditors........................................................... 12,500 Fixed deposit ................................................... 18,000 Bills payable .................................................... 16,000 Loan provided................................................... 12,000 Bank overdraft.................................................. 14,000 Closing stock.................................................... 24,000 Outstanding rent............................................... 10,000 Debtors............................................................. 14,000 Advance income............................................... 16,000 Bills receivable.................................................. 18,000 8,000 Prepaid salary................................................... 6,800 Accrued income................................................ 12,500 Cash at bank ................................................... 5,600 Cash in hand.................................................... 5,42,000 5,42,000 148 Office Management and Accountancy

Ill-5 The following is a trial balance of Khanal & Basnet Concern as on 31st December, 2017: Debit items Rs. Credit items Rs. 2,70,000 Cash at bank............................................. 85,000 Capital ....................................................... 3,15,000 Plant and machinery.................................. 1,50,000 Sales........................................................... Furniture and fittings.................................. Bills payable............................................... 87,500 Stock on 1st January ................................ 75,000 Sundry creditors......................................... 30,000 Investment ................................................ 60,000 24,000 Sundry debtors.......................................... 1,46,000 Bills receivable........................................... 2,00,000 Interest on investment................................ 80,000 Salary........................................................ 50,000 Bank loan.................................................... 6,500 Wages to labourers................................... 35,000 General reserve.......................................... 20,000 Purchases.................................................. 18,000 Commission received................................. 3,500 Return inward............................................ 24,000 Bank overdrafts.......................................... Drawings.................................................... Return outward........................................... 9,82,500 Factory rent and insurance........................ 1,80,000 Rent paid................................................... 15,000 Bad debts.................................................. 18,000 Insurance premium.................................... 28,000 34,000 6,000 4,500 9,82,500 Required: a) Trading and profit and loss account b) Balance sheet Solution: a) Cr. Trading and Profit and Loss Account of Khanal & Basnet Concern Amount Dr. For the year ending 31st December , 2017 3,00,000 Particulars Amount Particulars 3,00,000 11,500 To Opening stock ................................... 60,000 By Sales..................................................3,15,000 24,000 To Purchases ...........................1,80,000 Less: Return inward ...................................15,000 6,500 20,500 Less: Return outward.....................3,500 1,76,500 62,500 To Wages to labourers ............................ 24,000 To Factory rent and insurance................... 28,000 To Gross profit c/d ..................................... 11,500 3,00,000 To Salary ................................................ 18,000 By Gross profit b/d ............................................ To Rent .............................................. 34,000 By Interest on investment ................................. To Bad debts ................................... 6,000 By Commission received .................................. To Insurance premium ............................... 4,500 By Net loss c/d .................................................. 62,500 Final Accounts 149

b) Balance Sheet of Khanal & Basnet Concern As on 31st December, 2017 Capital and liabilities Amount Assets Amount 1,50,000 Capital............................................... 2,70,000 2,31,500 Plant and machinery ....................................... Less: Net loss....................................... 20,500 80,000 Furniture and fittings ....................................... 75,000 Investment ...................................................... 2,00,000 2,49,500 Sundry debtors................................................ Less: Drawings..................................... 18,000 Bills receivable................................................. 50,000 General reserve............................................... 35,000 1,46,000 Cash at bank................................................... 85,000 Bank loan......................................................... 30,000 Sundry creditors.............................................. 5,95,000 87,500 Bills payables .................................................. 20,000 Bank overdrafts .............................................. 5,95,000 Similarities between trial balance and balance sheet Trial balance and balance sheet are similar in the following points:  Both the trial balance and balance sheet are statements but not account.  Both the trial balance and balance sheet are prepared on the basis of ledger account balances.  Both statements are prepared on a particular date.  Both of these statements do not use the prefix ‘To’ and ‘By’.  Both of these statements record only those accounts which have balance.  Both of these statements ensure the principle of double entry system. Differences between a trial balance and balance sheet Following are the main differences between a trial balance and balance sheet: Basis of Trial balance Balance sheet difference 1. Meaning It is the statement of debit It is the statement of assets and and credit balance of ledger liabilities of the business firm at 2. Purpose accounts. the particular date. 3. Basis of preparation It is prepared to check the It is prepared to know the true arithmetical accuracy of financial position of the business books of account. firm. It is prepared on the basis It is prepared on the basis of trial of ledger accounts. balance. 150 Office Management and Accountancy