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

Basis	Double entry system	Single entry system
Record of Transactions	The 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 Books	Various subsidiary books like journal, Sales Book, Purchases Book, etc., are normally maintained.	No subsidiary book except Cash Book is maintained.
Ledger Accounts	A ledger contains personal, real, nominal accounts are maintained.	There may be no ledger only some personal accounts are mainatained.
Trial Balance	Trial balance is prepared.	Trial balance can not be prepared. Hence accuracy of accounts can not be established.
Final Accounts	Trading 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.
Users	All 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:

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

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:

STATEMENT OF AFFAIRS as On ……….

Liabilities	Rs.	Assets	Rs.
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 Balance	XXX	By Cash Received	XXX
To Credit Sales	XXX	By Bad Debts	XXX
To B/R Dishonoured	XXX	By Discount Allowed	XXX
To Expenses Charged	XXX	By Bills Receivable	XXX
		By Sales Returns	XXX
By Closing Balance	XXX

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 Paid	XXX	By Opening Balance	XXX
To Discount Received	XXX	By Credit Purchases	XXX
To Bills Payable	XXX	By B/P Dishonoured	XXX
To Purchase Returns	XXX	By Endorsed B/R Dishonoured	XXX
To B/R endorsed	XXX
To Closing Balance	XXX

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 Balance	XXX	By Cash Received	XXX
To Total Debtors (Drawn during the year)	XXX	By Bank	XXX
		By Discount	XXX
By Total Debtors (Dishonoured)	XXX
By Total Creditors (endorsed)	XXX
By Closing Balance	XXX

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 Paid	XXX	By Opening Balance	XXX
To Total creditors (Dishonour) To Closing Balance	XXX XXX	By 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 Balance	XXX	By Balance (overdraft)	XXX
To Cash Sales	XXX	By Cash purchases	XXX
To Collection from Debtors	XXX	By Paid to creditors	XXX
To Collection for Bills Receivable	XXX	By Paid for Bills Payable	XXX
To Capital introduced	XXX	By Sundry Expenses	XXX
To Other Receipts	XXX	By Drawings	XXX
		By Closing Balance	XXX

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 Creditors	XXX	Buildings	XXX
Bill payable	XXX	Furniture	XXX
Loans	XXX	Machinery	XXX
Outstanding Exps.	XXX	Stock	XXX
Other Liabilities	XXX	Debtors	XXX
Capital (Bal. Fig.)	XXX	Bills Receivable	XXX
	XXX	Cash and Bank	XXX
	Other Assets	XXX

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 Liabilities*	*As on* *1^st April, 2009* *Rs.*	*As on* *31^st March, 2010* *Rs.*
Creditors	16,370	13,000
Sundry Expenses Outstanding	1,350	650
Sundry Assets	11,000	12,040
Stock-in-trade	8,650	11,120
Cash in Hand and at Bank	7,390	8,080
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	10,000	Cash and Discount credited to Debtors	65,000
Add: Outstanding (Closing)	650	Less: Realisation from Debtors	62,500
	10,650	Discount allowed	2,500
Less: Outstanding (Opening)	1,350
	9,300

Combined Cash and Bank Account

Particulars	Dr	Particulars	Cr
To Balance b/d	7,390	By Sundry Creditors	60,270
To Sundries (C) (cash deposit)	5,000	By Sundries (C) (cash deposited into bank)	5,000
To Sundries (C) (cash withdrawn from Bank)	9,200	By Sundries (C) (cash withdrawn from bank)	9,200
To Sundry Debtors	62,500	By Drawings	3,180
To Capital Account (additional)	8,500	By Machinery	430
To Sales (Cash Sales) [Balancing Figure]	4,600	By Sundry Expenses	10,000
		By Purchases	1,030
By Balance c/d	8,080
97,190		97,190

Total Debtors Account

Particulars	Dr	Particulars	Cr
To Balance b/d (Balancing Figure)	17,530	By Bank	62,500
To Sales (credit sale) [71,810 – 4,600]	67,210	By Discount (W.N.2)	2,500
		By Returns Inward	1,450
By Bad Debts	420
By Balance c/d	17,870
84,740		84,740

Total Creditors Account

Particulars	Dr	Particulars	Cr
To Bank	60,270	By Balance b/d	16,370
To Discount	800	By Purchases (Balancing Figure)	58,000
To Returns Outward	300
To Balance c/d	13,000
	74,370		74,370

Balance Sheet as on 1.4.2009

Liabilities	Rs.	Assets	Rs.
Capital (Balancing Figure)	26,850	Sundry Assets	11,000
Sundry Creditors	16,370	Stock-in-trade	8,650
Outstanding Expenses	1,350	Sundry Debtors (W.N.4)	17,530
		Cash in Hand & at Bank	7,390
44,570		44,570

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

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

		Rs.’000			Rs.’000
To	Opening stock	700	By	Sales	?
To	Purchases	?	By	Closing stock	?
To	Direct expenses	175
To	Gross profit c/d	?
		?			?
To	Establishment expenses	740	By	Gross profit b/d	?
To	Interest on loan	60	By	Commission	100
To	Provision for taxation	?
To	Net profit c/d	?
		?			?
To	Proposed dividends	?	By	Balance b/f	140
To	Transfer to general reserve	?	By	Net profit b/d	?
To	Balance transferred to Balance sheet	?
		?			?

Balance Sheet as at 31^st March, 2008

Liabilities	Amount	Assets	Amount
	(Rs.’000)		(Rs.’000)
Paid-up capital	1,000	Fixed assets:
General reserve:		Plant & machinery	1,400
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 31^st 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 = 2/3^rd 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 dividend	666.67
	Transfer to general reserve	666.67
	Profit and loss balance transferred to balance sheet	66.66
		1,400.00
	Less: Balance b/f	140.00
	Net profit for the year	1,260.00
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 31^st March, 2008 (Amount in Rs 000)

	Particulars	Dr		Particulars	Cr
To	Opening stock	700.00	By	Sales (W.N.10)	5366.66
To	Purchases (Bal. Fig.)	2613.33	By	Closing stock (W.N.11)	1341.67
To	Direct expenses	175.00
To	Gross profit c/d (W.N.9)	3,220.00
		6,708.33			6,708.33
To	Establishment expenses	740.00	By	Gross profit b/d (Bal. Fig.)	3,220.00
To	Interest on loan	60.00	By	Commission	100.00
To	Provision for tax (W.N.8)	1,260.00
To	Net profit c/d	1,260.00
		3,320.00			3,320.00
To	Proposed dividends (W.N.1)	666.67	By	Balance b/f	140.00
To	Transfer to general reserve (W.N.2)	666.67	By	Net profit b/d (Bal. Fig.)	1,260.00
To	Balance transferred to Balance sheet (W.N.3)	66.66
		1,400.00			1,400.00

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

Liabilities	Rs.	Assets	Rs.
Paid-up capital	1,000.00	Fixed assets:
General reserve:		Plant & machinery	1,400.00
Balance at the beginning (W.N.14)	1333.34	Other fixed assets (Bal. Fig.)	1066.67
Proposed addition (W.N.2)	666.67	Current Assets:
Profit and loss A/c	66.66	Stock (W.N.11)	1341.67
10% Loan A/c (W.N.4)	600.00	Sundry debtors (W.N.13)	933.33
Current liabilities (W.N.5)	1,200.00	Cash at bank	125.00
	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) Balances	31.3.2005	31.3.2006
	Rs.	Rs.
Sundry Debtors	35,400	58,800
Sundry Creditors	84,400	22,400
Cash at Bank	1,08,400	2,500
Cash in Hand	10,400	500
Rent (Outstanding for one month)	2,400	3,000
Stock	11,400	20,000
Electricity and Telephone bills-outstanding	—	6,400

(ii) Bank Pass-book reveals the following	Rs.
Total Deposits	10,34,000
Withdrawals:
Creditors	8,90,000
Professional charges	34,000
Furnitures and Fixtures (acquired on 1.10.05)	54,000
Proprietor’s drawings	1,61,900

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

Particulars	Rs.
Dr.	Cr.
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

Particulars	Rs.
Dr.	Cr.
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
	9,12,400	9,12,400

3) Cash Book

Particulars	Cash (Rs.)	Bank (Rs.)
Dr.	Cr.	Dr.	Cr.
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
	11,84,500	11,84,500	11,42,400	11,42,400

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

Particulars		Rs.
Dr.	Cr.
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 31.3.2006	3,000	30,600
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

Liabilities	2005 Rs.	2006 Rs.	Assets	2005 Rs.	2006 Rs.
Capital Account (Bal. Fig.)	78,800	1,01,300	Furniture (54,000 – 2,700)	–	51,300
Sundry Creditors	84,400	22,400	Stock	11,400	20,000
Outstanding Expenses:			Sundry Debtors	35,400	58,800
Rent	2,400	3,000	Bank	1,08,400	2,500
Electricity & Telephone		6,400	Cash	10,400	500
	1,65,600	1,33,100		1,65,600	1,33,100

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 31^st December	Profit Rs.
2004	18,000
2005	32,000
2006	57,000
2007	50,000
2008	33,000

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

Position as on 31^st 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 30^th September, 2003 on which he had agreed to pay simple interest at 12% p.a. The loan was repaid along with interest on 31^st 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 31^st 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:

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:-

	Rs.
Sundry Debtors	28,800
Less: Bad debt (Insolvent peon)	600
	28,200

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:-

	Rs.
Advance for purchase of a piece of Land =	8,000
Payment of balance amount for purchase =	31,000
Costs of registration =	8,500
	47,500

Statement of Affairs as on 31.12.03

Liabilities		Rs.	Assets	Rs.
Loan from friend Add: Outstanding interest (Wn. 1)	5,000 150	5,150	Sundry Debtors Stock in trade –at cost (Wn.-2)	20,000 50,000
Trade Creditors		6,000	Cash in hand & at bank	12,600
Outstanding expenses		1,600
Capital (Balancing figure)		69,850
82,600	82,600

Statement of Affairs as on 31.12.08

Liabilities	Rs.	Assets	Rs.
Bank overdraft	12,000	Sundry Debtors (Wn.-3)	28,200
Trade Creditors	10,000	Stock in trade-at cost (Wn.-4)	48,000
Outstanding Exps.	600	Cash in hand	250
Capital (Bal. Fig.)	53,850
	76,450	76,450

Statement of Profit for the Period 1.1.03 to 31.12.08

Particulars	Rs.
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 theatre	18,000
Less: Capital as on 31.12.03 as per statement	2,78,350 69,850
Profit	2,08,500

Statement Showing Annual Profits and Their Differences with Reported Profits: 2004-08

Year ended	Apportionment Ratio	Annual Profit	Profit Reported To bank Rs.		Difference
31.12.04	3	3/25	2,08,500 x 3/25	25,020	18,000	(+)	7,020
31.12.05	4	4/25	2,08,500 x 4/25	33,360	32,000	(+)	1,360
31.12.06	4	4/25	2,08,500 x 4/25	33,360	57,000	(-)	23,640
31.12.07	6	6/25	2,08,500 x 6/25	50,040	50,000	(+)	40
31.12.08	8	8/25	2,08,500 x 8/25	66,720	33,000	(+)	33,720
	25			2,08,500	1,90,000	(+)	18,500

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

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

Liabilities	Rs.	Assets	Rs.
Capital Account	2,52,500	Machinery	1,20,000
Sundry Creditors for purchases	45,000	Furniture	20,000
		Stock	33,000
		Debtors	1,00,000
		Cash in hand	8,000
		Cash at Bank	16,500
	2,97,500		2,97,500

Riots occurred and fire broke out on the evening of 31^st 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 31^st 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 expenses	Rs.1,57,500 (including Rs.5,000 paid by cheque and Rs.7,500 was outstanding as on 31^st March, 2002)
Repairs	Rs.3,500 (paid by cash)
Addition to Machinery	Rs.60,000 (paid by cheque)
Private drawings	Rs.30,000 (paid by cash)
Travelling expenses	Rs.18,000 (paid by cash)
Introduction of additional capital by depositing it to the Bank	Rs.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 31^st 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:

Calculation of sales during 2001-2002:

Debtors as on 31^st 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 1/3^rd 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:

	Rs.
Sales in 2001-2002	9,60,000
Gross Profit @ 25%	2,40,000
Cost of goods sold (purchases)	7,20,000

Calculation of Sundry Creditors for goods:

	Rs.
Cost of goods sold(Wn.2)	7,20,000
Less: cash purchase	50,000
	6,70,000

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:

	Rs.
Opening Balance	1,00,000
Add: Credit Sales	7,20,000
	8,20,000
Less: Closing Balance (Wn.4)	1,20,000
	7,00,000

Calculation of Payment of Creditors:

	Rs.
Opening Balance	45,000
Add: Credit Purchases (Rs.7,20,000 – Rs.50,000)	6,70,000
	7,15,000
Less: Closing Balance [Wn.3]	55,833
Payment by cheque	6,59,167

Cash and Bank Account

Particulars	Cash(Rs.)	Bank(Rs.)
Dr.	Cr.	Dr.	Cr.
To Balance b/d	8,000		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
	2,48,000	2,48,000	7,24,167	7,24,167

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

Particulars	Rs.
Dr.	Cr.
To Opening Stock	33,000
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/d	2,40,000
	9,93,000	9,93,000
By Gross Profit b/d		2,40,000
To Business Expenses	1,57,500
To Repairs	3,500
To Depreciation [15% of Rs.(1,20,000 + 60,000)]	27,000
To Traveling Expenses	18,000
To Loss by theft	1,500
To Net Profit	32,500
	2,40,000	2,40,000

Balance Sheet of Sri Agni Dev as at 31^st 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 2,667	Machinery (1,20,000 + 60,000) Less: Depreciation @ 5% Stock in Trade	1,80,000 27,000	1,53,000 33,000

2,90,000 20,000 30,000	Sundry 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 :

	Rs.	.	Rs.
Capital	10,00,000	Fixed Assets	4,00,000
Creditors (Trade)	1,40,000	Stock	3,00,000
Profit & Loss A/c	60,000	Debtors	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
	Rs.	Rs.
Purchases	14,10,000	1,10,000
Sales	19,20,000	2,00,000

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 31^st March, 2001

Particulars	Rs.
Dr.	Cr.
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
	24,20,000	24,20,000

2) Calculation of Depreciation on Fixed Assets:

	Rs.
Fixed Assets (As on 31^st 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 31^st March, 2001

Particulars	Rs.
Dr.	Cr.
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
	24,56,000	24,56,000
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 31^st March, 2001

Liabilities		Rs.	Assets		Rs.
Capital Profit & Loss Account (as on 1^st April,2000) Add: Profit for the year	60,000 3,74,000	10,00,000
	Fixed Assets	4,00,000
4,34,000	Additions	1,00,000
Creditors		1,10,000		5,00,000
			Less: depreciation	50,000	4,50,000
			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

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