Accounts from Incomplete Records

Single Entry Method of Accounting

In Single Entry method of accounting, unlike Double Entry System, the dual aspects of every transaction are not recorded. So, Trial Balance can not be prepared. Personal Accounts of the debtors and creditors of the trader are often kept like Double Entry System, but the postings are made to Personal Accounts.

Advantages of Single Entry System

  • Simplicity: Single entry system is simple. A person not having complete knowledge of accounting can also maintain accounts books in this system.
  • Lesser Accounting entries: All accounts as required under double entry system are not maintained under single entry system. Only personal accounts and Cash Book are maintained. So, accounting work volume is less.
  • Low Cost: The accounting work is reduced, so, expenses involved in maintenance of accounts (Salary of accounts staff, stationery etc.) are also reduced.
  • Suitability: Single entry system is suitable only for small business and household accounting.

Disadvantages of Single Entry System      

  • No trial balance can be prepared and hence, arithmetic accuracy of books of account cannot be proved.
  • The single entry system lacks the check of arithmetical accuracy of posting, flexibity and adaptability.
  • As nominal accounts are not kept or, are incomplete, interim accounts, or comparative or other managerial information cannot be obtained.
  • Trading and Profit and Loss Account and the Balance Sheet cannot be prepared as many ledger accounts are not maintained.
  • Any information obtained under the system will not be free from doubt.
  • It is difficult to fix proper value of various assets, especially of goodwill when the owner likes to sell the business.
  • Since accounts of the assets are not maintained, it may be difficult to keep full control over the assets and check misappropriations as well as frauds.

Double Entry System vs. Single Entry System

BasisDouble entry systemSingle entry system
Record of TransactionsThe dual aspects of all transactions are recorded.There is no record of some transactions, for some transactions only in one aspect are recorded whereas for some other transactions, both their aspects are recorded.
Subsidiary BooksVarious subsidiary books like journal, Sales Book, Purchases Book, etc., are normally maintained.No subsidiary book except Cash Book is maintained.
Ledger AccountsA ledger contains personal, real, nominal accounts are maintained.There may be no ledger only some personal accounts are mainatained.
Trial BalanceTrial balance is prepared.Trial balance can not be prepared. Hence accuracy of accounts can not be established.
Final AccountsTrading and Profit and Loss Account and Balance Sheet are prepared in a scientific manner.Only a rough estimate of Profit or loss is made and a Statement of affairs resembling Balance Sheet which may not present a correct picture of the financial position of the business.
UsersAll business units normally use double entry system.Small business units and household uses Single entry system for accounting.

Method of Capital Comparison

Capital is increased if there is profit, while capital is decreased if there is loss. However, if the proprietor/partners bring fresh capitals in the business, capital is increased; if they make withdrawal, capital is decreased. So, while determining the profit by capital comparison, the following rules are to be followed:

Capital at the end….
Add: Drawings 
Fresh capital introduced 
Capital in the beginning….

The opening capital and closing capital may be determined by preparing statements of affairs at the two respective points of time. Capital = Assets – Liabilities.

Thus preparation of statement of affairs requires listing up of assets, liabilities and their amount. It find out values of fixed assets like building, machinery, furniture, vehicles, etc. and various current assets like stock in-trade, sundry debtors, bills receivable, loans and advances, cash and bank balances etc. Similarly, identify various liabilities like loans from banks and other organizations, bank overdraft, sundry creditors, bills payable, outstanding expenses, etc. Obtain information from the current account statement of the business, from cash book and the personal diary maintained by the proprietor/partners.

After obtaining all necessary information about assets and liabilities, the next task is to prepare statement of affairs at two different points of time. The design of the statement of affairs is just like balance sheet as given below:


Capital (Balancing Figures) Building, Machinery 
Loans, Bank overdraft Furniture, stock, 
Sundry creditors Sundry debtors 
Bills payable Loans and advances 
  Cash and bank 

Ascertainment of Profit

Net worth Method : Under this method two statements are prepared:

  • Statement of Profit and Loss.
  • Statement of Affairs.

Profit or Loss for a period is ascertained by comparing the capital at the end of the period with that at the beginning after making adjustments for withdrawals or introduction of capital during the period. If the closing capital exceeds the opening capital, such excess is considered to be profit for the period and if the opening capital exceeds the closing capital, such excess is consideration to be a loss for the period.

Following procedure should be adopted while preparing these statements:

  • Calculate capital in the beginning and at the end of accounting period. These will be ascertained by calculating net assets and liabilities of the two periods.
  • Values of assets should be taken after deprecation and provisions if any.
  • If balances of capital accounts and current accounts in the beginning are given, take both the balances. However, debit balance of current account will be deducted.
  • Total drawings (cash as well as goods) should be added to closing capital.
  • Additional capital introduced during the year and capital in the beginning should be deducted.

Conversion Method : To prepare Trading and Profit and Loss Account from incomplete records, all transactions are to be converted into Double Entry. The missing figures are to be ascertained and all accounts are to be drawn as per double entry system, from the available information.

The conversion can be of two types:

  • Permanent Conversion : Accounts under single entry may be converted into double entry to maintain accounts as per double entry system in future, as per procedure explained below:
  • A statement of affairs containing all assets and liabilities to be prepared. The difference between assets & liabilities represents capital.
  • Cash accounts will be opened in the books.
  • Cash Book to be prepared. If bank account is maintained, Double column Cash Book may be maintained. All receipts and payments will be shown in the Cash Book. Balance of Cash Book will show closing cash and Bank balances.
  • Ledger is to be opened for all accounts.
  • Personal Accounts of Customers should be completed by posting from credit sales, sales returns, Bad Debts, Discount allowed, Bills Receivable drawn, Cash received, and closing Balance of Debtors be ascertained. Similarly, Creditors accounts should be completed by posting from Credit purchases, discount received, purchase returns, Bills Payable accepted and closing balance of creditors be ascertained.
  • Subsidiary Books- Purchase and Sales Day Books are to be prepared. These will be totaled periodically and posted to the relevant accounts.
  • Entries for sales and purchase of asset should be made to the relevant asset account from relevant Journal & Cash Book.
  • Profit or loss on sale of assets should be recorded properly.
  • Any transaction which has not been recorded, should be recorded and posted to the relevant accounts.
  • After completing all accounts in the above manner, prepare Trial Balance.
  • Trading and Profit and Loss Account and Balance Sheet can be prepared from the Trial Balance.
  • Temporary Conversion : Trading and Profit and Loss Account may be prepared, without maintaining the books as per double entry system permanently, through Abridged Conversion, as explained below:
  • Calculate opening capital by preparing opening statement of affairs.
  • A Summary of Cash Book showing all receipts and payments be prepared and scrutinized. Missing entries should be incorporated.
  • Total Debtors Account and Total Creditors Account should be prepared and relevant balancing figure should be ascertained.
  • Bills Receivable and Bills payable Accounts should be prepared and missing entries should be ascertained and incorporated.  

 Preparation of Various Accounts

To ascertain missing figures, various accounts are required to be prepared. The common types of entries for such accounts are explained below:

(i)                                                                               Total Debtors Account

Dr.  Cr.
To Opening BalanceXXXBy Cash ReceivedXXX
To Credit SalesXXXBy Bad DebtsXXX
To B/R DishonouredXXXBy Discount AllowedXXX
To Expenses ChargedXXXBy Bills ReceivableXXX
  By Sales ReturnsXXX
By Closing BalanceXXX

In Total Debtors Account, significant entries are- opening balance, Credit Sales, Cash Received, Bills Receivable drawn during the year and closing balance. Out of these the missing figure can be computed.

(ii)                                                                                Total Creditors Account

Dr.  Cr.
To Cash PaidXXXBy Opening BalanceXXX
To Discount ReceivedXXXBy Credit PurchasesXXX
To Bills PayableXXXBy B/P DishonouredXXX
To Purchase ReturnsXXXBy Endorsed B/R DishonouredXXX
To B/R endorsedXXX  
To Closing BalanceXXX

In Total Creditors Account, significant entries are Opening balance, Credit Purchases, Cash Paid, Bills Payable accepted during the year and closing balance. Any missing figure out of them may be computed.

(iii)                                                                              Bills Receivable Account

Dr.  Cr.
To Opening BalanceXXXBy Cash ReceivedXXX
To Total Debtors (Drawn during the year)XXXBy BankXXX
  By DiscountXXX
By Total Debtors (Dishonoured)XXX
By Total Creditors (endorsed)XXX
By Closing BalanceXXX

If B/R is dishonoured, it is debited to Total Debtors Account and Credited to B/R Account. But if B/R has been discounted with Bank or endorsed to creditor, Bank Account and Creditors Accounts respectively will be credited.

In Bills Receivable Account significant contents are opening balance, Bills drawn during the year, Cash received and closing balance. Any one missing figure will be balancing amount.

(iv)                                                                              Bills Payable Account

Dr.  Cr.
To Cash PaidXXXBy Opening BalanceXXX
To Total creditors (Dishonour) To Closing BalanceXXX XXXBy Total Creditors       (Bills accepted during the  year)XXX

In Bills Payable Account, significant entries are Opening balance, Bills accepted during the year, Cash paid and closing balance, any missing figure may be computed.

  • Cash Book

If there are bank transactions multicolumn Cash Bank Book should be prepared.

Cash Book

Dr.  Cr.
To Opening BalanceXXXBy Balance (overdraft)XXX
To Cash SalesXXXBy Cash purchasesXXX
To Collection from DebtorsXXXBy Paid to creditorsXXX
To Collection for Bills ReceivableXXXBy Paid for Bills PayableXXX
To Capital introducedXXXBy Sundry ExpensesXXX
To Other ReceiptsXXXBy DrawingsXXX
  By Closing BalanceXXX

Balancing figure may be derived from one account may be used in the other account also. For example, if balancing figure of Total Creditors Account is payment to creditors, this will be shown in cash book also.

Opening Statement of Affairs

Liabilities Assets 
Sundry CreditorsXXXBuildingsXXX
Bill payableXXXFurnitureXXX
Outstanding Exps.XXXStockXXX
Other LiabilitiesXXXDebtorsXXX
Capital (Bal. Fig.)XXXBills ReceivableXXX
 XXXCash and BankXXX
 Other AssetsXXX

Application of Gross Profit Rate

If gross profit rate is known, any of the figure of opening stock, purchases, sales or closing stock can be calculated. Gross Profit Rate is the percentage of gross profit on sales.

Gross Profit Rate = (Gross Profit/sales) x 100

Ascertaining credit sales and purchases

Ex. From the following data, you are to ascertain the missing amounts.

Assets and LiabilitiesAs on 1st April, 2009 Rs.As on 31st March, 2010 Rs.
Sundry Expenses Outstanding1,350650
Sundry Assets11,00012,040
Cash in Hand and at Bank7,3908,080
Trade Debtors?17,870
Details relating to transaction in the year: Cash and Discount credited to Debtors   65,000
Sales Returns 1,450
Bad Debts 420
Sales (Cash and Credit) 71,810
Discount allowed by Trade Creditors 800
Purchase Returns 300
Additional Capital-paid into Bank 8,500
Realisation from Debtors-paid into Bank 62,500
Cash Purchases 1,030
Cash Expenses 10,000
Paid by cheque for Machinery purchased 430
Household expenses drawn from Bank 3,180
Cash paid into Bank 5,000
Cash drawn from Bank 9,200
Cash in hand on 31.3.2010 1,200
Cheque issued to Trade Creditors 60,270

Solution:Steps involved in solving the above problem-

  • Calculation of Sundry Expenses.
  • Calculation of Discount allowed to Debtors.
  • Preparation of Combined Cash and Bank Account.
  • Preparation of Total Debtors Account.
  • Preparation of Total Creditors Account.
  • Preparation of Balance Sheet (1.4.2009).

Working Details:

Calculation of Sundry Expenses: Calculation of Discount allowed to Debtors:- 
 Rs. Rs.
Cash Expenses        10,000Cash and Discount credited to Debtors65,000
Add: Outstanding (Closing)650Less: Realisation from Debtors62,500
 10,650Discount allowed2,500
Less: Outstanding (Opening)     1,350  
  • Combined Cash and Bank Account
To Balance b/d7,390By Sundry Creditors60,270
To Sundries (C) (cash deposit)5,000By Sundries (C) (cash deposited into bank)5,000
To Sundries (C) (cash withdrawn from Bank)9,200By Sundries (C)  (cash  withdrawn from bank)9,200
To Sundry Debtors62,500By Drawings3,180
To Capital Account (additional)8,500By Machinery430
To Sales (Cash Sales) [Balancing Figure]4,600By Sundry Expenses10,000
  By Purchases1,030
By Balance c/d8,080
97,190 97,190
  • Total Debtors Account
To Balance b/d (Balancing Figure)17,530By Bank62,500
To Sales (credit sale) [71,810 – 4,600]67,210By Discount (W.N.2)2,500
  By Returns Inward1,450
By Bad Debts420
By Balance c/d17,870
84,740 84,740
  •  Total Creditors Account
To Bank60,270By Balance b/d16,370
To Discount800By Purchases (Balancing Figure)58,000
To Returns Outward300  
To Balance c/d13,000  
 74,370 74,370
  • Balance Sheet as on 1.4.2009
Capital (Balancing Figure)26,850Sundry Assets11,000
Sundry Creditors16,370Stock-in-trade8,650
Outstanding Expenses1,350Sundry Debtors (W.N.4)17,530
  Cash in Hand & at Bank7,390
44,570 44,570

Ex. Following incomplete information of X Ltd. are given below:

Trading and Profit & Loss Account for the year ended 31st March, 2008

  Rs.’000  Rs.’000
ToOpening stock700BySales?
ToPurchases?ByClosing stock?
ToDirect expenses175   
ToGross profit c/d     ?          
       ?       ?
ToEstablishment expenses740ByGross profit b/d?
ToInterest on loan60ByCommission100
ToProvision for taxation?   
ToNet profit c/d     ?          
       ?       ?
ToProposed dividends?ByBalance b/f140
ToTransfer to general reserve?ByNet profit b/d?
ToBalance transferred to Balance sheet      ?          
       ?       ?

Balance Sheet as at 31st March, 2008

 (Rs.’000) (Rs.’000)
Paid-up capital1,000Fixed assets: 
General reserve: Plant & machinery1,400
Balance at the beginning of the year?Other fixed assets?
Proposed addition?Current assets: 
Profit and loss account?Stock?
10% Loan account?Sundry debtors?
Current liabilities          ?Cash at bank      125
        ?        ?   

Other information:

  • Current ratio is 2:1.
  • Closing stock is 25% of sales.
  • Proposed dividends to paid-up capital ratio is 2:3.
  • Gross profit ratio is 60% of turnover.
  • Loan is half of current liabilities.
  • Transfer to general reserves to proposed dividends ratio is 1:1.
  • Profit carried forward is 10% of proposed dividends.
  • Provision for taxation is equal to the amount of net profit of the year.
  • Balance to credit of general reserve at the beginning of the year is twice the amount transferred to that account from the current year’s profits.

All working notes should be part of your answer. You are required to complete:

(i)  Trading and Profit and Loss Account for the year ended 31st March, 2008 and

(ii) The Balance Sheet as on that date.

Solution: Step involved in solving the above problem-

  • Working details of missing amounts.
  • Preparation of Trading and Profit and Loss Account.
  • Preparation of Balance Sheet.

Working Notes:

1.Proposed dividend to paid up capital is 2:3.
 i.e. Proposed dividend =  2/3rd of paid up capital
= Rs.1,000.00 thousand ×  2/3rd Rs.666.67 thousand
2.Transfer to General Reserve is equal to proposed dividend i.e., 1:1. 
 Proposed dividend is Rs.666.67 thousand,
therefore general reserve is also Rs.666.67 thousand.
3.Profit carried forward to Balance Sheet = 10% of Proposed Dividend
 i.e., Rs.666.67 thousand × 10% = Rs.66.66 thousand
4.10% Loan implies interest on loan being 10%
                 i.e. Rs.60.00 thousand × 100 /10 = Rs.600.00 thousand
5.Loan is half of current liabilities which means current liabilities are twice of loan
i.e., Rs.600.00 thousand × 2 = Rs.1,200.00 thousand
6.Current Ratio i.e., current assts/ current liabilities i.e.2:1 or 2/1 i.e. Current Assets =  2 x Current Liabilities
or 2 x Rs.1,200.00 thousand = Rs.2,400.00 thousand
7.Current Net Profit                                                                                                                                            (Rs. in ‘000s)
 Proposed dividend666.67
 Transfer to general reserve666.67
 Profit and loss balance transferred to balance sheet    66.66
 Less: Balance b/f   140.00
 Net profit for the year1,260.00
8.Provision for taxation is equal to current net profit i.e., Rs.1,260.00 thousand
9.Gross profit being balancing figure of Profit and Loss A/c = Rs.3,220.00 thousand
10.Gross profit = 60% of sales i.e.
 Rs.3,220.00 thousand = 60% of sales
 Or, sales = 3,320 x 100/60 = Rs.5,366.67 thousand
11.Closing stock is 25% of sales i.e., 25% of Rs.5,366.67 thousand = Rs.1,341.67 thousand
12.Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand
13.Debtors   = Current Assets – Closing Stock – Cash at Bank                  = Rs.2,400.00 thousand – Rs.1,341.67 thousand – Rs.125.00 thousand
                 = Rs.933.33 thousand
14.Balance of general reserve at the beginning of the year is twice of the amount transferred to general reserve during the year i.e. 2 x Rs.666.67 thousand = Rs.1,333.34 thousand
15.Other fixed assets = Total of balance sheet (liabilities side)- Current assets – Plant and machinery
                 i.e., Rs.4,866.67 thousand – Rs.2,400.00 thousand – Rs.1,400.00 thousand
                 = Rs.1,066.67 thousand

Trading and Profit & Loss A/c for the year ended 31st March, 2008 (Amount in Rs 000)

 ParticularsDr ParticularsCr
ToOpening stock700.00BySales (W.N.10)5366.66
ToPurchases (Bal. Fig.)2613.33ByClosing stock (W.N.11)1341.67
ToDirect expenses175.00   
ToGross profit c/d  (W.N.9)3,220.00                 
  6,708.33  6,708.33
ToEstablishment expenses740.00ByGross profit b/d (Bal. Fig.)3,220.00
ToInterest on loan60.00ByCommission100.00
ToProvision for tax (W.N.8)1,260.00   
ToNet profit c/d1,260.00                 
  3,320.00  3,320.00
ToProposed dividends (W.N.1)666.67ByBalance b/f140.00
ToTransfer to general reserve  (W.N.2)666.67ByNet profit b/d (Bal. Fig.)1,260.00
ToBalance transferred to Balance sheet (W.N.3)
  1,400.00  1,400.00

Balance Sheet as at 31st March, 2008 (Rs. in ‘000s)

Paid-up capital1,000.00Fixed assets: 
General reserve: Plant & machinery1,400.00
Balance at the beginning (W.N.14)1333.34Other fixed assets (Bal. Fig.)1066.67
Proposed addition  (W.N.2)666.67Current Assets: 
Profit and loss A/c66.66Stock  (W.N.11)1341.67
10% Loan A/c (W.N.4)600.00Sundry debtors  (W.N.13)933.33
Current liabilities  (W.N.5)1,200.00Cash at bank125.00
 4,866.67 4,866.67

Preparation of Statement of Affair

Ex. Mr. X runs a retail business. Suddenly he finds on 31.3.2006 that his Cash and Bank balances have reduced considerably.  He provides you the following information:

(i)      Balances31.3.200531.3.2006
                Sundry Debtors35,40058,800
                Sundry Creditors84,40022,400
                Cash at Bank1,08,4002,500
                Cash in Hand10,400500
                Rent (Outstanding for one month)2,4003,000
                Electricity and Telephone bills-outstanding6,400
(ii)     Bank Pass-book reveals the followingRs.
                Total Deposits10,34,000
                                Professional charges34,000
                                Furnitures and Fixtures (acquired on 1.10.05)54,000
                                Proprietor’s drawings1,61,900
  • Rent has been increased from January, 2006.
  • Mr. X deposited all cash sales and collections from debtors after meeting wages, shop expenses, rent, electricity and telephone charges.
  • Mr. X made all purchases on credit.
  • His credit sales during the year amounts to Rs.9,00,000.
  • He incurred Rs.6,500 per month towards wages.
  • He incurred following expenses:
    • Electricity and telephone charges Rs.24,000 (paid),
    • Shop expenses Rs.18,000 (paid).
  • Charge depreciation on furniture and fixtures @ 10% p.a.

Finalize the accounts of Mr. X and compute his profit for the year ended 31.3.2006.  Prepare his statement of affairs and reconcile the profit and capital balance.

Solutions: Steps involved in solving the above Problem:

  • Preparation of Total Debtors Account.
  • Preparation of Total Creditors Account.
  • Preparation of Cash Book.
  • Preparation of Trading and Profit & Loss A/c.
  • Preparation of Statement of Affairs as on 31.3.2005 & 31.3.2006.

Working Details:-

1)                                       Sundry Debtor A/c

To Opening balance    35,400 
To Credit sales  9,00,000 
By Cash (Bal. Fig)  8,76,600
By Balance c/d     58,800
   9,35,400 9,35,400

2)                                      Sundry Creditor A/c

By Opening balance 84,400
To Bank    8,90,000 
To Closing balance       22,400 
By Purchase A/c (credit)(Balancing figure) 8,28,000

3)                                                                                     Cash Book

ParticularsCash (Rs.)Bank (Rs.)
To Balance b/d  10,400 1,08,400 
To Sundry debtors (W.N-1)8,76,600   ——- 
To Cash sales (bal. Fig)2,97,500   ——- 
To Cash (C)  10,34,000 
By Bank (C) 10,34,000 ——-
By Wages (6,500 x12)      78,000 ——
By Rent {( 2,400 x10) + (3,000 x 2)}      30,000 ——-
By Electricity & telephone      24,000 ——–
By Shop expenses      18,000 ——
By Professional charges      ——–  34,000
By Sundry creditors     ——– 8,90,000
By Furniture     ——–    54,000
By Drawings     ——- 1,61,900
By Balance c/f      500      2,500

4)                                                                  Trading and Profit & Loss A/c of Mr. X for the year ended March 31, 2006

Particulars Rs.
To Opening Stock     11,400 
To Purchase (WN-2)   8,28,000 
By Sales:   
    Þ Cash (W.N –3)                                     2,97,500  
    Þ Credit (W.N –1)                                   9,00,000 11,97,500
By Closing Stock       20,000
To Gross Profit c/d   3,78,100 
  12,17,500 12,17,500
By Gross Profit b/d     3,78,100
To Wages      78,000 
To Rent                                                        30,000  
Less: Outstanding on 1.4.2005                                                 (2,400)     
Add: Outstanding on 31.3.20063,00030,600 
To Electricity &  Telephone                                  24,000  
Add:- Outstanding                                                6,400     30,400 
To Professional Charges      34,000 
To Shop Expenses      18,000 
To Depreciation [ 10% of 54,000 x 6/12]        2,700 
To Net Profit   1,84,400 
    3,78,100   3,78,100

5)                                     Statement of Affairs of Mr. X as on 31-03-2005 & 31-03-2006

Liabilities2005 Rs.2006 Rs.Assets2005 Rs.2006 Rs.
Capital Account (Bal. Fig.)78,8001,01,300Furniture (54,000 – 2,700)51,300
Sundry Creditors84,40022,400Stock11,40020,000
Outstanding Expenses:  Sundry Debtors35,40058,800
 Electricity & Telephone 6,400Cash10,400500
 1,65,6001,33,100 1,65,6001,33,100

Calculation of Total Income

Ex. Dipak keeps slips of paper from which he makes up his annual accounts. He has borrowed moneys from a bank to whom he has to submit figures of profits every year. He has given the bank the following profit figures:

Year ending 31st DecemberProfit Rs.

Verify whether the figures of profits reported are correct, based on the following information:

  • Position as on 31st December, 2003:

Sundry debtors Rs.20,000;

Stock in trade (at 95% of the cost) Rs.47,500;

Cash on hand and at bank Rs.12,600;

Trade creditors Rs.6,000.

Expenses due Rs.1,600.

  • He had borrowed Rs.5,000 from his friend on 30th September, 2003 on which he had agreed to pay simple interest at 12% p.a. The loan was repaid along with interest on 31st December, 2005.
  • In December, 2004, he had advanced Rs.8,000 to A for purchase of a piece of land. The property was registered in March, 2006 after payment of balance consideration of Rs.31,000. Costs of registration incurred for this were Rs.8,500.
  • Dipak purchased jewellery for Rs.20,000 for his wife in October 2006, Anniversary expenses incurred in January, 2007 were Rs.19,000.
  • A new Home theatre was purchased by him in March 2008 for Rs.18,000.
  • His annual household expenses amounted to Rs.24,000 for all these years.
  • The position of assets and liabilities as on 31st December 2008 was:

Overdraft with bank (secured against property) Rs.12,000,

Trade creditors Rs.10,000,

Expenses payable Rs.600;

Sundry debtors (including Rs.600 due from a Peon declared insolvent by court) Rs.28,800;

Stock in trade (at 125% of cost to reflect market value) Rs.60,000 and

Cash on hand Rs.250.

It is found that the rate of profit has been uniform throughout the period and the proportion of sales during the years to total sales for the period was in the ratio of 3 : 4 : 4 : 6 : 8.

Ascertain the annual profits and indicate differences, if any, with those reported by Dipak to the bank earlier.

Solution: Steps involved in solving the above problem-

 Calculation of Outstanding Interest of Loan from his friend as on 31.12.03.
 Valuation of Stock-in-Trade as on 31.12.03.
 Calculation of Sundry Debtors as on 31.12.08.
 Valuation of Stock-in-Trade as on 31.12.08.
 Calculation of Cost of Property.
 Preparing Statement of Affairs as on 31.12.03.
 Preparing Statement of Affairs as on 31.12.08.
 Preparing Statement of Profit.
 Preparing Statement Showing Annual Profit.

Working Details:

  1. Calculation of Outstanding Interest of Loan from his friend as on 31.12.03:-

        Rs.5,000 x 12% x 3/12 (i.e. Oct. to Dec. ‘03) = Rs.150                                                                                                                                                                                               

  • Valuation of Stock-in-Trade as on 31.12.03:-

Stock in Trade (at 95% of cost) = Rs.47,500.

So, Stock in Trade (at 100% of cost) = Rs.47,500 x 100/95 = Rs.50,000.

  • Calculation of Sundry Debtors as on 31.12.08:-
Sundry Debtors28,800
Less: Bad debt (Insolvent peon)600
  • Valuation of Stock-in-Trade as on 31.12.08:-

125% of cost = Rs.60,000.

100% of cost = Rs.60,000 x 100/125 = Rs.48,000. 

  • Calculation of Cost of Property:-
Advance for purchase of a piece of Land   =8,000
Payment of balance amount for purchase  =31,000
Costs of registration                                    =8,500
  • Statement of Affairs as on 31.12.03
Liabilities Rs.AssetsRs.
Loan from friend Add: Outstanding interest (Wn. 1)5,000 150  5,150Sundry Debtors Stock in trade –at cost (Wn.-2)20,000 50,000
Trade Creditors 6,000Cash in hand & at bank12,600
Outstanding expenses 1,600  
Capital  (Balancing figure) 69,850  
  • Statement of Affairs as on 31.12.08
Bank overdraft12,000Sundry Debtors (Wn.-3)28,200
Trade Creditors10,000Stock in trade-at cost (Wn.-4)48,000
Outstanding Exps.600Cash in hand250
Capital (Bal. Fig.)53,850  
  •      Statement of Profit for the Period 1.1.03 to 31.12.08
Capital as on 31.12.08 as per statement (Wn. -7)53,850
Add: Drawings during the period (Rs.24,000 x 5)1,20,000
Purchase of property (Wn. -5)47,500
Purchase of jewellery & anniversary expenses (20,000 + 19,000)39,000
Purchase of New Home theatre18,000
  Less: Capital as on 31.12.03 as per statement2,78,350 69,850
  • Statement Showing Annual Profits and Their Differences with Reported Profits: 2004-08
Year endedApportionment RatioAnnual ProfitProfit Reported To bank Rs. Difference
31.12.0433/252,08,500 x 3/2525,02018,000(+)7,020
31.12.0544/252,08,500 x 4/2533,36032,000(+)1,360
31.12.0644/252,08,500 x 4/2533,36057,000(-)23,640
31.12.0766/252,08,500 x 6/2550,04050,000(+)40
31.12.0888/252,08,500 x 8/2566,72033,000(+)33,720
 25  2,08,5001,90,000(+)18,500


Computation of Sales, Purchase, Payment to Debtors & from Creditors

Ex. The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2001:

Capital Account2,52,500Machinery1,20,000
Sundry Creditors for purchases45,000Furniture20,000
  Cash in hand8,000
  Cash at Bank16,500
 2,97,500 2,97,500

Riots occurred and fire broke out on the evening of 31st March, 2001, destroying the books of account and Furniture. The cashier was grievously hurt and the cash available in the cash box was stolen. The trader gives you the following information:

  • Sales are effected as 25% for cash and the balance on credit. His total sales for the year ended 31st march, 2002 were 20% higher than the previous year. All the sales and purchases were evenly spread throughout the year (as also in the last year).
  • Terms of credit

Debtors             2 Months

Creditors           1 Months

  • Stock level was maintained at Rs.33,000 all throughout the year.
  • A steady Gross Profit rate of 25% on the turnover was maintained throughout the year. Creditors are paid by cheque only, except for cash purchase of Rs.50,000.
  • His private and the Bank Pass-book disclosed the following transactions for the year:
Miscellaneous Business expensesRs.1,57,500 (including Rs.5,000 paid by cheque and Rs.7,500 was outstanding as on 31st March, 2002)
RepairsRs.3,500 (paid by cash)
Addition to MachineryRs.60,000 (paid by cheque)
Private drawingsRs.30,000 (paid by cash)
Travelling expensesRs.18,000 (paid by cash)
Introduction of additional capital by depositing it to the BankRs.5,000
  • Collections from debtors were all through cheques.
  • Depreciation of Machinery is to be provided @ 15% on the Closing Book Value.
  • The cash stolen is to be charged to the Profit and Loss Account.
  • Loss of furniture is to be adjusted from the Capital Account.

Prepare Trading, Profit and Loss Account for the year ended 31st March, 2002 and a Balance Sheet as on that date. Make appropriate assumptions whenever necessary. All working should from part of your answer.    

Solution: Steps involved in solving the above problem-

  • Calculation of sales during 2001-2002.
  • Calculation of purchase during 2001-2002.
  • Calculation of Sundry Creditors for goods.
  • Calculation of Sundry Debtors for goods.
  • Calculation of collection from Debtors.
  • Calculation of payment to Creditors.
  • Preparation of Cash and Bank Account.
  • Preparation of Trading and Profit and Loss Account.
  • Preparation of Balance Sheet.

Working Details:

  1. Calculation of sales during 2001-2002:

Debtors as on 31st March, 2001 = Rs.1,00,000

(i.e., equals to 2 months of credit  sales)

Credit sales of 1 months (1,00,000/2) = Rs.50,000

Credit sales of 12 months/Total credit sales in 2001/2002 = (Rs.50,000 x 12) = Rs.6,00,000

Cash sales being equal to 1/3rd of credit sales or¼ of total

Sales in 2001-2002                                                                                            = Rs.2,00,000 

Sales in 2001-2002                                                                                              Rs.8,00,000

Increase, 20% as stated in the problem                                                              Rs.1,60,000 

Total sales during 2001-2002                                                                              Rs.9,60,000  

Cash Sales (25% of Rs.9,60,000)    = Rs.2,40,000

Credit Sales (75% of Rs.9,60,000)   = Rs.7,20,000

  • Calculation of Purchases during 2001-2002:
Sales in 2001-20029,60,000
Gross Profit @ 25%2,40,000
Cost of goods sold (purchases)7,20,000 
  • Calculation of Sundry Creditors for goods:
Cost of goods sold(Wn.2)7,20,000
Less: cash purchase50,000

Creditors are equal to 1 month on credit sales = [(6,70,000/12)x 1] = Rs.55,833

  • Calculation of Sundry Debtors for goods:

It is equivalent to 2 months of credit sales

So, Sundry Debtors = 7,20,000 x 2/12 = Rs.1,20,000

  • Calculation of Collection from Debtors:
Opening Balance1,00,000
Add: Credit Sales7,20,000 
Less: Closing Balance (Wn.4)1,20,000  
  • Calculation of Payment of Creditors:                                 
Opening Balance45,000
Add: Credit Purchases (Rs.7,20,000 – Rs.50,000)6,70,000
Less: Closing Balance [Wn.3]55,833
Payment by cheque6,59,167
  • Cash and Bank Account
To Balance b/d8,000 16,500 
To Collection from Debtors  (As per Wn.5) 7,00,000 
To Sales (Wn.1)2,40,000  
To Additional Capital 5,000 
To Balance c/d (Bank overdraft) 2,667 
By Payment to Creditors (Wn..6) 50,000 6,59,167
By Misc. expenses 1,45,000 5,000
By Repairs 3,500 
By Addition to Machinery  60,000
By Travelling Expenses 18,000 
By Private Drawings 30,000 
By Balance c/d (lost by theft) 1,500  

8. Trading and Profit and Loss Account of Sri, Agni Dev for the year ended 31st March, 2002

To Opening Stock33,000 
To Purchase (W.N.2)7,20,000 
By Sales (W.N.1) 9,60,000
By Closing Stock 33,000
To Gross Profit c/d2,40,000 
By Gross Profit b/d 2,40,000
To Business Expenses1,57,500 
To Repairs3,500 
To Depreciation [15% of Rs.(1,20,000 + 60,000)]27,000 
To Traveling Expenses18,000 
To Loss by theft1,500 
To Net Profit32,500 
  • Balance Sheet of Sri Agni Dev as at 31st March, 2002
Liabilities Rs.Assets Rs.
Capital Add: Additional Capital         Net Profit   Less: i) Loss of Furniture          ii) Drawings   Bank Overdraft (Wn.7)2,52,500 5,000 32,500            2,40,000 2,667Machinery (1,20,000 + 60,000) Less: Depreciation @ 5% Stock in Trade1,80,000 27,000  1,53,000 33,000
2,90,000 20,000 30,000Sundry Debtors (Wn.4) 1,20,000
Sundry Creditors (Wn.3) 55,833   
Outstanding Expenses 7,500   
  3,06,000  3,06,000

Projected Profit & Loss A/c & Balance Sheet

Ex. The following is the Balance Sheet of a concern on 31st March, 2000 :

Capital10,00,000Fixed Assets                                                            4,00,000
Creditors (Trade)1,40,000Stock                                                                        3,00,000
Profit & Loss A/c60,000Debtors                                                                    1,50,000
  Cash & Bank                                                            3,50,000
 12,00,000 12,00,000

The management estimates the purchases and sales for the year ended 31st March, 2001 as under:

                                                                                                                                           Upto 28.2.2001 March 2001
Purchases                 14,10,0001,10,000
Sales                                                                                                                         19,20,0002,00,000

It was decided to invest Rs.1,00,000 in purchases of fixed assets, which are depreciated @ 10% on cost.

The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The business earns a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover. The amount of depreciation is not included in these expenses.

Draft a Balance Sheet as at 31st March, 2001 assuming that creditors are all Trade Creditors for purchases and debtors for sales and there is no other item of current assets and liabilities apart from stock and cash and bank balances.                                         

Solutions: Steps involved in solving the above Problem:

  • Preparation of Cash and Bank Account.
  • Calculation of Depreciation on Fixed Assets.
  • Preparation of Projected Trading and Profit and Loss Account.
  • Preparation of Projected Balance Sheet.

Working Details:-


Cash and Bank Account  for the year ended 31st March, 2001

To Balance b/d 3,50,000 
To Sundry Debtors (Rs.1,50,000 + Rs.19,20,000)20,70,000 
By Sundry Creditors (Rs.1,40,000 + Rs. 14,10,000) 15,50,000
By Expenses [10% of Rs.(19,20,000 + 2,00,000]   2,12,000
By Fixed Assets   1,00,000
By Balance c/d   5,58,000              

2)     Calculation of Depreciation on Fixed Assets:

Fixed Assets (As on 31st March 2000) 4,00,000
Fixed Assets (Additions)                                        1,00,000
          Total value of fixed Assets                                              5,00,000

Depreciation = (10% on Rs. 5,00,000)=  Rs.50,000


Projected Trading and Profit and Loss Account for the year ended 31st March, 2001

To Opening Stock  3,00,000 
To Purchases (14,10,000 + 1,10,000) 15,20,000 
By Sales         (19,20,000 + 2,10,000) 21,20,000
By Closing Stock (balancing figure)   3,36,000       
To Gross Profit c/d (30% on sales)   6,36,000 
By Gross Profit b/d   6,36,000
To Sundry Expenses (10% on sales)   2,12,000 
To Depreciation (W.N –2)       50,000 
To Net Profit   3,74,000 
    6,36,000  6,36,000

4. Projected Balance Sheet as on 31st March, 2001

Liabilities Rs.Assets Rs.
Capital Profit & Loss Account (as on 1st April,2000)            Add: Profit for the year      60,000 3,74,00010,00,000   
 Fixed Assets4,00,000 
Creditors   1,10,000     5,00,000 
   Less: depreciation50,0004,50,000
   Stock in trade (W.N- 3) 3,36,000
   Sundry debtors 2,00,000
   Cash & Bank balances (W.N- 1) 5,58,000
  15,44,000  15,44,000

Click Here for PDF