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Advance Financial Accounting (FIN-611)
VU
LESSON # 2
PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
Following question illustrates how adjustments are incorporated in the closing statement of
affairs and what is the difference in a Balance Sheet and a Statement of Affairs.
By solving this question students will learn that the only items of Statement of Profit or loss are
four i.e., opening balance of owners' equity, closing balance of owners' equity, fresh capital
and drawings the result after adjusting these items accordingly will be Net profit for the year.
Remember one thing the adjustments like depreciations, provision for doubtful debts, accruals
etc are not accounted for in the statement of profit or loss.
Question
Ali and Bilal are partners in a firm sharing profits and losses in the proportion of 3:2. They
keep their books on the single entry system. On 31 December, 2006, the following Statement of
Affairs was extracted from their books:
Liabilities
Rs
Assets
Rs
Capital Accounts
Plant & Machinery
30,000
Ali
25,000
Stock
20,000
Bilal
20,000
Sundry Debtors
35,000
Loan- Bilal
25,000
Cash at Bank
15,000
Sundry Creditors
30,000
1,00,000
1,00,000
On 31st December, 2007, their assets and liabilities were: Sundry Debtors Rs 40,000; Sundry
Creditors Rs 25,000 Plant & Machinery Rs 50,000; Stock Rs 30,000; Bills Receivable Rs
5,000; Cash at Bank Rs 25,000; Loan- Bilal Rs 25,000.
You are required to prepare a Profit and Loss Statement for the year ended 31st December,
2007 and a Statement of Affairs as at that date after taking into consideration the following:
a) Plant and machinery is to be depreciated by 10% p.a.
b) Stock is to be reduced to Rs 25,000.
c) A provision for bad debts to be raised at 5% on Sundry Debtors
d) Interest on loan is to be allowed at 6% p.a.
e) During the period Ali and Bilal draw Rs 5,000 and Rs 3,000 respectively.
Solution
Statement of Affairs
Ascertainment of Combined Closing Capital as on December 31, 2007
Liabilities
Rs
Rs
Assets
Rs
Rs
Loan- Bilal
25,000
Plant & Machinery
50,000
Add:
Outstanding 1,500
26,500
Less: Depreciation
4,000 46,000
Interest
Stock
25,000
40,000
25,000
Sundry Debtors
Creditors
Less: Provision for 2,000
Doubtful debts
38,000
87,500
Bills Receivable
5,000
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Advance Financial Accounting (FIN-611)
VU
Combined Capital
Cash at bank
25,000
(balancing figure)
1,39,000
1,39,000
Ali & Bilal
Statement of Profit and Loss for the year ended 31.12.2007
Rs
Combined closing Capital (as above)
87,500
Add: Combined Drawings during the year (Rs 5,000+Rs 3,000)
8,000
95,500
Less: Combined Opening Capital (Rs 25,000 + Rs 20,000)
45,000
Profit before adjustments
50,500
Divisible profit:
Ali-3/5th of Rs. 50,500
30,300
Bilal 2/5th of Rs. 50,500
20,200
50,500
Ali & Bilal
Balance Sheet as at 31.12.2007
Liabilities
Rs
Rs
Assets
Rs
Rs
Plant & Machinery
50,000
Capital­Ali
Opening balance
Less: Depreciation
4,000 46,000
25,000
Add: Profit
25,000
Stock
30,000
Sundry Debtors
40,000
55,300
Less: Drawings
5,000  50,300
Less: Provision for  2,000
Doubtful debts
38,000
Capital- Bilal
Opening Balance
Bills Receivable
5,000
20,000
Add: Profit
Cash at bank
25,000
20,200
40,200
Less: Drawing
3,000  37,200
Loan- Bilal
25,000
Outstanding Interest
1,500
Sundry Creditors
25,000
1,39,000
1,39,000
Following question illustrates how changes in the balances of assets and liabilities affect the in
crease or decrease in the balances of owner's equity.
Important tips:
 Increase in the balance of asset will cause an increase in the owner's equity
 Increase in the balance of liabilities will cause a decrease in the owner's equity
 Decrease in the balance of asset will cause a decrease in the owner's equity
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Advance Financial Accounting (FIN-611)
VU
Decrease in the balance of liabilities will cause an increase in the owner's equity
Increase in balance means that closing balance is greater than the opening balance and
vice versa.
Question
Calculate net profit for the year ending on December 31, 2007 from the information regarding
changes occurred at the end of the year in following balances:
Rupees
Increase in Machinery
14,000
Increase in Stocks
6,000
Decrease in Debtors
2,000
Decrease in Cash
1,000
Increase in Creditors
1,500
Decrease in Accrued expenses
300
Drawings during the year 2007
10,000
Fresh capital introduced during the year 2007
4,000
Solution
Working:
Rupees
Increase/decrease in owner's equity (net assets)
Increase in Machinery
14,000
Increase in Stocks
6,000
Decrease in Debtors
(2,000)
Decrease in Cash
(1,000)
Increase in Creditors
(1,500)
Decrease in Accrued expenses
300
15,800
Statement of Profit or Loss
For the year ended December 31, 2007
Rupees
Increase in owner's equity
15,800
Add Drawings
10,000
Less Fresh Capital
(4,000)
Net Profit
21,800
Problem questions
Q. 1
A and B are carrying on business in partnership sharing profits and losses equally. They were
unable to maintain full and complete records. From the following available information,
compute the profits of the firm and prepare a Balance Sheet:
1.1.2007 (Rs)
31.12.2007 (Rs)
Land and Building (Cost)
50,000
50,000
Machinery (Cost)
60,000
75,000
Furniture (Cost)
20,000
25,000
Stock
12,000
30,000
Debtors
17,000
22,000
Bank
4,900
5,000
Cash
1,100
5,000
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Advance Financial Accounting (FIN-611)
VU
Prepaid Insurance Premium
5,000
-
Bills Receivable
-
8,000
Creditors
60,000
50,000
Bills Payable
10,000
-
At the beginning of the year, the capitals of the partners were equal. During the year, A brought
in Rs. 15,000 and B has withdrawn Rs. 5,000. An insurance policy matured during the year for
Rs. 10,000. A sum of Rs. 4,000 has become bad out of debtors. Provision has to be made for
depreciation @ 10% on Land and Building, Machinery and Furniture.
Q. 2
From the following information calculate net profit for the year ending on December 31, 2007
by preparing statement of profit or loss:
Rupees
Increase in Furniture
78,000
Decrease in Stocks
25,000
Decrease in Debtors
11,000
Increase in prepaid rent
2,000
Increase in Bank
7,000
Increase in Creditors
10,000
Decrease in Accrued expenses
3,000
Drawings during the year 2007
35,000
Fresh capital introduced during the year 2007
50,000
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet