Chapter 8 Solutions: Final Accounts
Answers to the Chapter 8 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, and full working for the 8-mark numerical problem.
Group A: Very Short Answer Questions (1 Mark Each)
1. Why is a Trading Account prepared?
A Trading Account is prepared to find the Gross Profit or Gross Loss made by a business from buying (or manufacturing) and selling goods during an accounting period.
2. How do you record outstanding salary expenses at the end of a year in the Final Accounts?
Outstanding salary given as an adjustment is added to Salary on the Debit side of the Profit & Loss Account and shown as a liability on the Capital & Liabilities side of the Balance Sheet.
3. What is a Balance Sheet?
A Balance Sheet is a statement prepared on the last day of an accounting period that shows the financial position of a business: its capital and liabilities on one side and its assets on the other.
Group C: Long Answer Numerical Practice (8 Marks)
1. Practice Problem: From the following Trial Balance of Gokarneshwor Traders as on the last day of Ashadh 2083, prepare Trading Account, Profit & Loss Account, and Balance Sheet:
- Debit Balances: Opening Stock Rs. 30,000; Purchases Rs. 1,50,000; Wages Rs. 15,000; Custom Duty Rs. 5,000; Salaries Rs. 35,000; Rent Rs. 12,000; Land & Building Rs. 2,00,000; Equipment Rs. 60,000; Debtors Rs. 50,000; Cash in Hand Rs. 43,000 (Total = Rs. 6,00,000).
- Credit Balances: Capital Rs. 2,20,000; Sales Rs. 3,10,000; Creditors Rs. 40,000; Commission Received Rs. 10,000; Bank Overdraft Rs. 20,000 (Total = Rs. 6,00,000).
- Adjustments: (i) Closing Stock Rs. 45,000; (ii) Outstanding Rent Rs. 3,000; (iii) Appreciate Land & Building by 10% and Depreciate Equipment by 10%.
Gokarneshwor Traders
Trading and Profit & Loss Account
For the year ended on the last day of Ashadh 2083
| Dr. Particulars | Details (Rs.) | Amount (Rs.) | Cr. Particulars | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| To Opening Stock | 30,000 | By Sales | 3,10,000 | ||
| To Purchases | 1,50,000 | By Closing Stock | 45,000 | ||
| To Wages | 15,000 | ||||
| To Custom Duty | 5,000 | ||||
| To Gross Profit c/d | 1,55,000 | ||||
| Total | 3,55,000 | Total | 3,55,000 | ||
| To Salaries | 35,000 | By Gross Profit b/d | 1,55,000 | ||
| To Rent | 12,000 | By Commission Received | 10,000 | ||
| Add: Outstanding Rent | 3,000 | 15,000 | By Appreciation on Land & Building (10% of 2,00,000) | 20,000 | |
| To Depreciation on Equipment (10% of 60,000) | 6,000 | ||||
| To Net Profit (transferred to Capital) | 1,29,000 | ||||
| Total | 1,85,000 | Total | 1,85,000 |
Gokarneshwor Traders
Balance Sheet
As on the last day of Ashadh 2083
| Capital and Liabilities | Details (Rs.) | Amount (Rs.) | Assets and Properties | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| Capital | 2,20,000 | Land & Building | 2,00,000 | ||
| Add: Net Profit | 1,29,000 | 3,49,000 | Add: Appreciation (10%) | 20,000 | 2,20,000 |
| Creditors | 40,000 | Equipment | 60,000 | ||
| Bank Overdraft | 20,000 | Less: Depreciation (10%) | (6,000) | 54,000 | |
| Outstanding Rent | 3,000 | Debtors | 50,000 | ||
| Closing Stock | 45,000 | ||||
| Cash in Hand | 43,000 | ||||
| Total | 4,12,000 | Total | 4,12,000 |
Answer: Gross Profit = Rs. 1,55,000; Net Profit = Rs. 1,29,000; Balance Sheet Total = Rs. 4,12,000.
Working notes:
- Direct expenses (Trading Account): Wages and Custom Duty are costs of bringing goods ready for sale, so they go to the Debit side of the Trading Account with Opening Stock and Purchases:
30,000 + 1,50,000 + 15,000 + 5,000 = 2,00,000. Gross Profit =(3,10,000 + 45,000) - 2,00,000 = 1,55,000. - Indirect expenses (Profit & Loss Account): Salaries
35,000, Rent with the outstanding amount12,000 + 3,000 = 15,000, and Depreciation on Equipment10% of 60,000 = 6,000, a total of56,000. - Indirect incomes: Commission Received
10,000and Appreciation on Land & Building10% of 2,00,000 = 20,000. Net Profit =1,55,000 + 10,000 + 20,000 - 56,000 = 1,29,000. - Each adjustment twice: Closing Stock is credited in the Trading Account and shown as an asset; Outstanding Rent is added to Rent and shown as a liability; the appreciation is an income and is added to Land & Building; the depreciation is an expense and is deducted from Equipment.
- Bank Overdraft is a current liability, so it goes on the Capital and Liabilities side.