FINANCIAL

STATEMENTS OF SOLE
PROPRIETORS
 MEANING OF FINANCIAL
STATEMENTS
 Financial statements are those
statements that are prepared at the end
of an accounting period to determine
the financial performance of an
accounting entity for the accounting
period and financial position of the
accounting entity at the end of the
accounting period.
 MEANING OF FINANCIAL
STATEMENTS
 The term ‘Financial Statements’ is refers to
the following set of financial statements:
❖ Manufacturing account (in the case of a
manufacturing entity)
❖ Trading A/c
❖ Profit and Loss A/c
❖ Balance Sheet
❖ Schedules and notes forming a part of all
the above mentioned accounts
❖ Cash Flow Statement (if applicable)
 MANUFACTURING ACCOUNT

 Manufacturing Account is prepared by

an enterprise engaged in manufacturing
activities

 It is prepared to ascertain the cost of

goods manufactured during an
accounting period

 It is closed by transferring its balance to

the debit of Trading Account
MANUFACTURING ACCOUNT
 MANUFACTURING ACCOUNT

Cost of goods
manufactured –
Rs. 99,800
 TRADING AND PROFIT AND
LOSS ACCOUNT
 Trading A/c is prepared to know the
Gross Profit or Gross Loss during the
accounting period.
 Basis of preparation is matching of sale
price of goods sold with the cost of
goods sold.
 Profit and Loss Account is prepared to
ascertain the net profit earned or net loss
earned in the accounting period.
 BALANCE SHEET

 Balance Sheet shows the financial

position of an enterprise at a given date.

 It is a summary of balances of those

ledger accounts which have not been
closed by transfer to the Trading and
Profit and Loss Account.
 BALANCE SHEET

 GROUPING AND MARSHALLING OF

ASSETS AND LIABILITIES
GROUPING – all items of similar nature
are put together under a common
heading e.g. Creditors
MARSHALLING – is the order in which
various assets and liabilities are shown
(order of liquidity or order of
permanence)
 CLOSING STOCK
Valued at lower of cost or NRV
If it does not appear in If it appears in the Trial
Trial Balance Balance

Closing Stock……..…Dr
To Trading A/c
Shown on the Directly shown on the
Credit side of the assets side of the
Balance Sheet
Trading A/c
And
Assets side of the
Balance Sheet
 CLOSING STOCK

The information about closing stock below

trial balance (for the year 2017-18) is as
under:

Closing stock valued at lower of cost or NRV

valued at ₹ 45,000
Pass the journal entry
 EXPENSES OUTSTANDING FOR
CURRENT YEAR
If it does not appear in the If O/s expenses appear in
Trial Balance (i.e. given in the Trial Balance
the adjustments)

 Expenses …………..Dr  No adjustment in the P & L

To Expenses O/s A/c

 Added to Expenses A/c in  Shown on the liability side

the P & L A/c of the Balance Sheet

 Liability side of the Balance

Sheet
 EXPENSES OUTSTANDING FOR CURRENT
YEAR
(SITUATION 1)
Ram & Co has taken a building on rent @ ₹
3,000 p.m. from the year 2017-18.

The information outside the trial balance as

at 31.3.2017 is given as under:
‘Rent for the month of March 2018 has not
been paid’
 EXPENSES OUTSTANDING FOR CURRENT
YEAR
(SITUATION 2)
Ram & Co has taken a building on rent @ ₹
3,000 p.m. from the year 2017-18.

The information before preparing the trial

balance as at 31.3.2017 is given as under:
‘Rent for the month of March 2018 has not
been paid’
PREPAID EXPENSES IN CURRENT
YEAR
If it does not appear in the If prepaid expenses appear in
Trial Balance (i.e. given in the the Trial Balance
adjustments)

 Prepaid Expenses …………..Dr  No adjustment in the P & L A/c

To Expenses
 Shown on the assets side of
 Subtracted from Expenses A/c the Balance Sheet
in the P & L A/c

 Assets side of the Balance

Sheet
 PREPAID EXPENSES IN
CURRENT YEAR
S has taken a building on rent @ ₹ 4,000
p.m. on 1.4.2017. It has paid rent
amounting to 56,000 in the year 2017-18.

Pass the journal entry when the

information about prepaid rent is given
outside the trial balance as at 31.3.2018.
 DEPRECIATION EXPENSE
If it does not appear in the If it appears in the Trial
Trial Balance (i.e. given in Balance
the adjustments)

 Depreciation A/c ………..Dr  Shown on the debit side of

To Assets A/c the P & L A/c

 Shown in the P & L A/c  No entry in the Balance

Sheet
 Subtracted from Assets in
the Balance Sheet
 DEPRECIATION EXPENSE

 A machinery appears in the trial balance

as at 31st March, 2018 at ₹ 1,50,000. The
rate of depreciation is 10%. Show the
relevant information in the accounts
 DEPRECIATION EXPENSE

The following is the extract of trial balance

of Ram & Co as at 31st March, 2018:
Particulars Dr.(₹) Cr.(₹)
Machinery A/c 1,50,000
Provision for depreciation A/c 6,000

Provide 10% depreciation on the original

cost of machinery for the year 2017-18.
 BAD DEBTS
If it does not appear in the If it appears in the Trial
Trial Balance (i.e. given in Balance
the adjustments)

 Bad Debts A/c ………..Dr  Shown on the debit side of

To Debtors A/c the P & L A/c

 Shown in the P & L A/c  No entry in the Balance

Sheet
 Subtracted from Sundry
Debtors in the Balance
Sheet
 PROVISION FOR BAD AND
DOUBTFUL DEBTS
 P & L A/c ………………………………………..…..Dr
To Provision for Doubtful Debts A/c

 Shown on the debit side of the P & L A/c

 Subtracted from Sundry Debtors in the Balance

Sheet
 EXAMPLES
 Following figures are taken from the Trial
Balance on the last of accounting year :
`
Sundry debtors 60,000
Bad debts 2,000

Create provision for doubtful debt at 5%

on debtor
 EXAMPLES
Profit and Loss Account
Bad Debts 2,000
Provision for Bad
Debts 3,000

Balance Sheet
Sundry Debtors 60,000
Less: Provision
for Bad debts 3,000 57,000
 EXAMPLES
 Extract from the Trial Balance as on 31st
March, 2000
`
Sundry debtors 40,000
Bad debts 1,500

Additional Information :
i. There was a further bad debt of
` 800
ii. Provide 5% provision for doubtful debt.
 EXAMPLES
Profit and Loss Account
Bad Debts 1,500
Additional Bad Debts
Provision for Bad
800
Debts 1,960
Balance Sheet
Sundry Debtors 40,000
Less: Additional Bad
Debts 800
Less: Provision
for Bad debts 1,960 37,240
 EXAMPLES
 Extract from a Trial Balance
Dr. (`) Cr. (`)

Sundry debtors 62,000

Provision for Doubtful Debts 2,500
Bad debts 1,800

Additional Information :
i. There was a further bad debt of
` 1,000
ii. Provide 5% provision for doubtful debt
 EXAMPLES
Provision for Bad Debts
Bad Debts 1,800 Bal b/d 2,500
Additional Bad Debts 1,000 Profit and Loss 3,350
Bal c/d 3,050 A/c (Bal Fig)

Balance Sheet
Sundry Debtors 62,000
Less: Additional Bad
Debts 1,000
Less: Provision
for Bad debts 3,050 57,950
 EXAMPLES
 Extract from a Trial Balance
Dr. (`) Cr. (`)
Sundry debtors 85,000
Provision for Doubtful Debts 3,500
Bad debts 2,850
Sundry debtors include an amount of `
5,000 due from ‘X” who became insolvent.
A dividend of 40 paise in a rupee is likely to
be received from him. Prepare Provision for
Bad and Doubtful Debts Account and show
the amount of Sundry Debtors to be shown
in the Balance Sheet. Provision for Bad
Debts required at the end is ` 4,000.
 EXAMPLES
Provision for Bad Debts
Bad Debts 2,850 Bal b/d 3,500
Additional Bad Debts 3,000 Profit and Loss 6,350
Bal c/d 4,000 A/c (Bal Fig)

Balance Sheet
Sundry Debtors 85,000
Less: Additional Bad
Debts 3,000
Less: Provision
for Bad debts 4,000 78,000
 PROVISION FOR DISCOUNT
ON DEBTORS
 P & L A/c …………………………………..…..Dr
To Provision for Discount on Debtors A/c
 Shown on the debit side of the P & L A/c
 Subtracted from Sundry Debtors in the Balance
Sheet
Provision for discount is calculated on the net
amount which will be definitely recovered from
debtors. Thus debts, which are bad and which
are doubtful should be deducted before
calculating provision for discount on debtors
 EXAMPLES
Extract from a Trial Balance
Dr. (`) Cr. (`)
Sundry debtors 82,000
Provision for Doubtful Debts 3,000
Provision for discount 1,000
Bad debts 2,800
Discount allowed 1,400

a. Make a provision for bad and doubtful debts @

5% on debtors
b. Create a provision for discount on debtors @ 2%
c. A customer who had to pay 2,000 became
insolvent. Nothing could be recovered from him.
d. Show these items in the Profit and Loss Account
and Balance Sheet.
 EXAMPLES
Provision for Bad Debts
Bad Debts 2,800 Bal b/d 3,000
Additional Bad Debts 2,000 Profit and Loss 5,800
Bal c/d 4,000 A/c (Bal Fig)

Provision for Discount on Debtors

Discount 1,400 Bal b/d 1,000
Bal c/d 1,520 Profit and Loss 1,920
[2% on 82000 – 2,000 A/c (Bal Fig)
– 4,000]
EXAMPLES
Balance Sheet

Sundry Debtors 82,000

Less: Additional Bad
Debts 2,000
Less: 5% Provision
for Bad debts 4,000
Less: 2% Provision for
Discount 1,520 74,480
 EXAMPLES
Extract from a Trial Balance
Dr. (`) Cr. (`)
Sundry debtors 2,05,000
Provision for Doubtful Debts 10,000
Provision for discount on debtors 1,800
Bad debts 3,000
Discount allowed 1,000

a. Additional bad debts ₹ 4,000

b. Additional discount allowed to debtors ₹ 1,000
c. Maintain a provision for bad debts @ 10% on
debtors
d. Maintain a provision for discount on debtors @ 2%
e. Show these items in the Profit and Loss Account
and Balance Sheet.
 bad debts written off
recovered
 Cash/Bank A/c………………………..Dr.
To Bad debts recovered A/c

 By means of closing entry, bad debts

recovered is transferred to Profit and Loss
A/c
 PROVISION FOR DISCOUNT
ON CREDITORS
 Provision for discount on creditors ..…..Dr
To P & L A/c

 Shown on the credit side of the P & L A/c

 Subtracted from Sundry Creditors in the

Balance Sheet
 GOODS DISTRIBUTED AS FREE
SAMPLES/DONATIONS
 Samples / Charity…………………………Dr.
To Purchases/Trading A/c

 P & L A/c……………………………………Dr.
To Samples/Charity
 GOODS TAKEN BY PROPREITOR
FOR SELF CONSUMPTION
 Drawings A/c………………………………Dr.
To Purchases

 Capital A/c………………………………Dr.
To Drawings A/c
 INCOME TAX
 Income tax is payable by owner and not
business. It is treated as drawings.

Income Tax A/c…………………………..Dr.

To Cash A/c

Drawings A/c……………………………...Dr.
To Income Tax A/c
 ADVANCE TAX

 Advance Tax A/c………………………Dr.

To Cash A/c

 Drawings A/c……………………………Dr.
To Advance Tax A/c
 PAYMENT OF LIFE INSURANCE
PREMIUM

 Drawings A/c……………………………..Dr.
To Cash A/c

 Capital A/c……………………………….Dr.
To Drawings A/c
 INTEREST ON CAPITAL

 Profit and Loss A/c……………………….Dr.

To Interest on Capital A/c

 Interest on Capital A/c………………….Dr.

To Capital A/c
 INTEREST ON DRAWINGS

 It may be charged to restrict frequent

drawings by the partners

 Interest on Drawings A/c………………Dr.

To P & L A/c

 Capital A/c……………………….Dr.
To Interest on Drawings A/c
 DEBTORS ARISING OUT OF
DISHONOUR OF BILLS
Debtors A/c …………………………….Dr.
To Bills Receivable A/c When bill is retained
To Bank A/c When discounted with bank
To Endorsee A/c When endorsed
 MUTUAL INDEBTEDNESS

 A debtor may be a creditor for the

business e.g. Sales to X for ` 1,000 and
purchases from him ` 500.
 Transfer the account which has a
smaller balance to account having
bigger balance.

 Creditors A/c…………………….Dr. 500

To Debtors A/c 500
 ABNORMAL LOSS OF STOCK

 Abnormal loss A/c………………Dr.

To Purchases/Trading A/c

 Insurance Co. A/c……………………….Dr.

P & L A/c…………………………………...Dr.
To Abnormal loss A/c
 GOODS SENT ON APPROVAL
BASIS
 It is not treated as sales unless approved or on the
expiry of the fixed period. At the year end, if the
goods are still lying with customers awaiting approval
-
 Sales A/c……………………………………….Dr.
To Debtors A/c
(to cancel previous entry of sales)
 Stock with customers A/c………………Dr.
To Trading A/c
 Trading A/c – (i) closing stock will be increased
by the amount of cost of sales
(ii)deduct from sales at selling price
 Balance Sheet – Deduct it from debtors at sales price
 GOODS RECEIVED ON
APPROVAL BASIS
 It is not treated as purchases unless approved
or on the expiry of the fixed period. Before
acceptance, supplier is the owner of the
goods. (Not included in closing stock also)
 Suppliers A/c…………………………….Dr.
To Purchases A/c
(if wrongly recorded as purchases)
 The cost of such goods are to be eliminated
from the closing stock if their cost were taken
into consideration at the time of closing stock
valuation
 GOODS-IN-TRANSIT

 The goods which have been purchased

but not received during the current
accounting period.
 These should be treated as part of
closing stock
 Shown on the Assets side of the Balance
Sheet
 Commission to Manager

 It is an expense like salaries, so the entry is

Profit and Loss A/c………………Dr.
To Commission
 If it is not paid within the accounting period,
it will be shown in the liability side of the
Balance Sheet
 VARIOUS DEDUCTIONS AT
SOURCE FROM SALARIES
 Concept of Gross and Net Salaries
 Salary A/c……………………………Dr
To Income tax deducted at source
To Employees contribution to Provident Fund
To Employees State Insurance Premium
To Other deductions
To Net Salaries Payable
( Being salaries and various deductions therefrom
recorded in the books)
 VARIOUS DEDUCTIONS AT
SOURCE FROM SALARIES
 Income tax deducted at source………………Dr
Employees contribution to Provident Fund….Dr
Employees State Insurance Premium………….Dr
Other deductions………………………………..Dr
Net Salaries Payable……………………………Dr
To Bank
(Being net salaries paid and various deductions
deposited with appropriate authorities)

If not deposited by the end of the accounting year, will be shown

as current liabilities
 PROVIDENT FUND

 P.F. scheme is a retirement benefit

scheme to which both employer and
employee contribute a minimum fixed
percentage of salary.

 The amount of both these contributions is

required to be invested in accordance
with the Provident Fund Act, 1952
 PROVIDENT FUND

To account for Salaries and wages A/c……………………..Dr.

employee’s To Employee’s contribution to P.F.
contribution to P.F. To Cash/Bank A/c

To account for
employer’s Salaries and wages A/c……………………..Dr.
contribution to P.F. To Employer’s contribution to P.F.

To account for Employee’s contribution to P.F……………..Dr.

investment of both Employer’s contribution to P.F………………Dr.
the contributions to To Bank A/c*
P.F. * If the amount has not been deposited within the
accounting period, it is to be shown in the Balance
Sheet as a current liability
 PROVIDENT FUND – QUES 1
 Following is the extract of the Trial balance as at
31st March, 2002
Dr. Cr.
Salaries 16,000
P.F. deducted from salaries 1,000

Additional Information : Provide for employer’s

share of P.F. equivalent to employee’s share of P.F.
 PROVIDENT FUND – QUES 1
 Journal
Dr. Cr.
Salaries A/c……………………………………Dr. 1,000
To Employers contribution to PF 1,000

Profit and Loss A/c

Salaries 16,000
Add : Employers
Contribution to PF 1,000 17,000

Balance Sheet
Provident Fund :
Employees contribution 1,000
Employers contribution 1,000 2,000
 DEFERRED REVENUE
EXPENDITURE
 A concern may incur heavy expenditure
on advertisement, sales promotion
schemes or on research projects and the
benefit thereof lasts many years to
come.
 Para 56 of AS 26 “Intangible Assets” such
expenditure is to be recognized as an
expense in the year in which it is incurred
 Prior period items

 Prior period items are those income and

expenses which arise in the current
period as a result of errors and
omissions in the preparation of
financial statements of one or more prior
periods.
- Para 4.3 of AS 5
 Prior period items

Errors may occur due

Not included in errors
to
• Mathematical • adjustments
mistakes necessitated by
• Mistakes in applying circumstances
accounting • e.g. arrears payable
principles to workers during the
• Misinterpretation of current period as a
facts result of revision of
wages with
retrospective effect
 Prior period items

• generally infrequent in nature

Nature of • are different from changes in
prior period accounting estimates

items

• should be separately
Disclosure of disclosed in the Statement
Prior period of Profit and Loss
items
 Value added tax (vat)

 VAT is a kind of tax levied on the sales

made within the state

 VAT paid on purchases is adjustable

against VAT collected on sales
 Value added tax (vat)

VAT Net liability

>
VAT Paid Collected to be paid
(Asset A/c) to the Govt
(Liability)

Net Asset

<
VAT Paid VAT Collected carried forward
(Asset A/c) (Liability) next year as
recoverable