Preparation of

Trial Balance
Arvind K Sharma

उ र दे श सहकार ाम वकास बक ल०
श ण क , लखनऊ
 Trial Balance

If both side balances of TRIAL BALANCE are not equal; we

can know that there is something wrong.

At times, TRIAL BALANCE may tally but still it may contain

some errors

Such errors may happen in recording the transactions,

miscalculation of transactions, error in summarizing the fin.
Transactions etc.

Classification of errors

Errors of omission Errors of commission

Errors of principle Errors of compensation
 Suspense Account

Sometimes even after the best efforts by accountants, the

trial balance does not tally.

In such a situation, to avoid the delay in the preparation of

final A/c, the difference in the trial balance is placed into a
newly opened A/c known as the SUSPENSE A/C.

Later on, the errors have to be located and necessary

rectification entries have to be passed so that the suspense
A/c can be closed.

In case, the suspense A/c cannot be closed, it will be taken

to the Balance Sheet on the assets side if it shows a debit
balance; or on the liabilities side if it shows a credit balance
 Errors of omission

Appears when a transaction is completely omitted in a

record & it will not affect the trial balance.

Example: Interest paid by a customer against his loan was

not recorded in Journal or P&L A/c

It can be detected only by reconciliation of the accounts of

the customer.
 Errors of commission

Appears when we commit some errors in recording a

transaction & it will not affect the trial balance.

It may include errors such as incorrect balancing of ledger

A/c, wrong posting, wrong c/f of opening or closing
balances, wrong totaling etc.

Example: Rs, 5000 received from Mr. Asthana was credited

in his A/c but for Rs.500
 Errors of principle

Appears when we could not understand the difference

between a capital & revenue expenditure

Example: Building may be capital item, but repairs and

renewals of building should be treated as revenue
expenditure, otherwise it will result into an error of
principle.
 Errors of compensation
Appears when one error is compensated by another error,
resulting no impact on trial balance

Example: Credit sale of Rs.5000 made to M/s Rakesh

Agarwal was by mistake posted into the A/c of Mr. Rakesh
Sharma.

Only comparing the customer’s account with the credit

memos / bills raised by the organization can prevent such
mistakes.
 How to correct a wrong entry?

A building was purchased for Rs.100,000 and the entry was:

Machine A/c Dr Rs.100,000

To Cash A/c Rs. 100,000

The error can be corrected as:

Building A/c Dr Rs.100,000

To Machine A/c Rs. 100,000
 How to correct a wrong entry?

The payment of a telephone bill was debited to advertising expense

Advertising expenses A/c Dr Rs. 5000

To Cash A/c Rs. 5000

The error can be corrected as:

Telephone expenses A/c Dr Rs. 5000

To Advertising expenses Rs. 5000
 How to make provisions?

Provisions are usually made for

 Doubtful debts

 Depreciation

 Repairs & Maintenance

 Contingencies
 Provision for Doubtful Debts

1. Provision for Bad Debts

Bad & Doubtful Debt A/c Dr Rs. 15000

To Sundry Debtor A/c Rs. 15000

(Expense/loss side in P&L account; Balance sheet CA – BDD)

Accounting prudence

Profit & Loss A/c Dr Rs. 20000

To Provision of Doubtful debts Rs. 20000

(if provision is made this year; then next year actual bad debt is
transferred to provision A/c not to P & L account, so net profit
will not be unduly affected next year)
 Provision for Doubtful Debts

Example: Trial Balance shows sundry debtors Rs.40,000; Bad debts

Rs.2700, Provision for bad debt Rs.3500, require to maintain 5 %
provision for BDD next year, what are the adjustment entry?

1. Already created as

Profit & Loss A/c Dr Rs. 3500

To Provision of Doubtful debts Rs. 3500

(Remember, if provision is made this year; then next year actual bad
debt is transferred to provision A/c not to P & L account, so net profit
will not be unduly affected next year)

2. So, now it will appear as

Provision for Doubtful Debts A/c Dr Rs. 2700

To Bad Debts A/c Rs. 2700
 So, the existing provision will become Rs.800 ( Rs.3500- Rs.2700). But
we require to make provision for 5 % of Sundry debtors Rs.70,000.

So we will create additional provision for the balance Rs.1200 as

Profit & Loss A/c Dr Rs. 1200

To Provision of Doubtful debts Rs. 1200

Profit & Loss Account of M/s X & Co. for the year ended 31-03-2014
Dr Cr
Amount Amount Amount Amount
Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To Provision for Doubtful Debts
Required for next year 2000
Add: Actual Bad Debts 2700
Total 4700
Less: Old Provision 3500 1200

Balance Sheet of M/s X & Co. as on 31-03-2014

Liabilities Assets
Rs. P Rs. P Rs. P Rs. P

Sundry debtors 40000

Less: Provision for Doubtful Debts 2000 38000

 Provision for Depreciation

Example: Trial Balance shows building value Rs. 1,20,000, how to

charge depreciation at 10 %?

1. To charge depreciation on fixed asset (Ex: Building)

Depreciation A/c Dr Rs. 12000

To Building A/c Rs. 12000

2. To transfer depreciation to P & L A/c (Ex: Building)

Profit & Loss A/c Dr Rs. 12000

To Depreciation A/c Rs. 12000
 Profit & Loss Account of M/s X & Co. for the year ended 31-03-2014
Dr Cr
Amount Amount Amount Amount
Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To Provision for Depreciation on
Building 12000

Balance Sheet of M/s X & Co. as on 31-03-2014

Liabilities Assets
Rs. P Rs. P Rs. P Rs. P

Building 1,20,000

Less: Depreciation 12,000 1,08,000

 Provision for Depreciation

Example: Trial Balance shows building value Rs. 1,20,000, how to

charge provision for depreciation in the 1st Year at 10 %?

1. To create provision for depreciation on fixed asset (Ex: Building)

Profit & Loss A/c Dr Rs. 12000

To Provision for Depreciation A/c Rs. 12000
 Profit & Loss Account of M/s X & Co. for the year ended 31-03-2014
Dr Cr
Amount Amount Amount Amount
Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To Provision for Depreciation on
Building 12000

Balance Sheet of M/s X & Co. as on 31-03-2014

Liabilities Assets
Rs. P Rs. P Rs. P Rs. P

Building 1,20,000

Less: provision for Depreciation 12,000 1,08,000

 Provision for Depreciation

Example: Trial Balance shows building value Rs. 1,20,000, provision for
depreciation in Trial Balance is Rs.12000, WDV depreciation for the 2nd
Year at 10 %?

In the 2nd Year beginning building value will be Rs. 1,20,000 – 12,000
= 1,08,000. Therefore at the end of 2nd Year we have to calculate
depreciation 10 % for Rs. 1,08,000. so,

Profit & Loss A/c Dr Rs. 10,800

To Provision for Depreciation A/c Rs. 10,800
 Profit & Loss Account of M/s X & Co. for the year ended 31-03-2014
Dr Cr
Amount Amount Amount Amount
Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To Provision for Depreciation on
Building 10,800

Balance Sheet of M/s X & Co. as on 31-03-2014

Liabilities Assets
Rs. P Rs. P Rs. P Rs. P

Building 1,20,000

Less: provision for Depreciation 22,800 97,200

 Techniques of Financial Analysis

1. Comparative Statements

2. Common Size Statements

3. Ratio Analysis

4. Funds Flow Analysis

5. Cash Flow Analysis

6. Cost-Volume-Profit Analysis
 1. Comparative Statements

1. Can be prepared for Income Statements (or) for Balance

Sheets.

2. It shows absolute figures for two or more periods

3. The absolute change b/w 2 periods are shown in % also

 UTTAR PRADESH SAHKARI GRAM VIKAS BANK LIMITED; HEAD OFFICE, LUCKNOW
NAME OF THE BRANCH: LALITPUR, DISTRICT: LALITPUR
Profit & Loss Account for the year ended on 31-03-2013 & 2014 (Comparative Statement)
Dr Cr
2013 2014 2013 2014
Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To TA (Staff, BMC) XXX XXX By Intt. Earned XXX XXX
To postage & telegrams XXX XXX By Admission fees XXX XXX
To Telephone charges XXX XXX By Admn Fees XXX XXX
To Stationery consumed XXX XXX By Sale of forms XXX XXX
To Salary & Allowances XXX XXX By Head Office reimbursements XXX XXX
To Bonus & Exgratia XXX XXX By miscellaneous income XXX XXX
To Bank charges XXX XXX
To Rent & Taxes XXX XXX
To Electric charges XXX XXX
To Depreciation XXX XXX
To Intt. Paid XXX XXX
To P.O.L Charges XXX XXX
To Jeep Rent XXX XXX
To Advertisement charges XXX XXX
To Borrowing cost XXX XXX
ToLegal & Admn charges XXX XXX
To Entertainment expenses XXX XXX
To Incentives to VDOs XXX XXX
To Remuneration to Leg.Adv XXX XXX
To Rebates, etc XXX XXX
To Arms Guard XXX XXX
To Uniform XXX XXX
To Miscellaneous exp XXX XXX
Total XXXX XXXX Total XXXX XXXX
 Profit & Loss Account of M/s Radhika enterprises for the years ended on 31-03-2013 & 2014
(Rs. in Lakh)
Dr Cr

2013 2014 2013 2014

Particulars Particulars
Rs. P Rs. P Rs. P Rs. P
To Cost of Goods Sold 600 750 By Sales 800 1000
To Operating Expenses
Administrative Expenses 20 20
Selling Expenses 30 40
To Net Profit 150 190
Total 800 1000 Total 800 1000

Profit & Loss Account of M/s Radhika enterprises for the years ended on 31-03-2013, 14
(Comparative Income Statements : Rs. in Lakh)
Dr Cr

2013 2014 Absolute +, - % Increase / Decr

Particulars
Rs. P Rs. P Rs. P Rs. P
Net Sales 800 1000 200 25
Cost of Goods Sold 600 750 (150) 25
Gross Profit 200 250 50 25
Operating Expenses
(-) Administrative Expenses 20 20 - -
(-) Selling Expenses 30 40 (10) 33.33
Total Operating Expenses 50 60 (10) 20
Net Operating Profit 150 190 40 26.67
 Balance Sheets of M/s Vasanth & Co (P) Ltd as on 31.03.2013 and 2014 (Rs. in Lakh)

2013 2014 2013 2014

Liabilities Assets
Rs. P Rs. P Rs. P Rs. P
Bills Payable 50 75 Cash 100 140
Sundry Creditors 150 200 Sundry Debtors 200 300
Tax Payable 100 150 Stock 200 300
6 % Debentures 100 150 Land 100 100
6 % Preference Shares 300 300 Building 300 270
Equity Capital 400 400 Plant 300 270
Reserves 200 245 Furniture 100 140
Total 1300 1520 Total 1300 1520

Balance Sheets of M/s Vasanth & Co (P) Ltd as on 31.03.2013 and 2014 (Rs. in Lakh)
(Comparative Balance Sheets: Rs. in Lakh)
2013 2014 Absolute +, - % Increase / Decr
Assets
Rs. P Rs. P Rs. P Rs. P
Current Assets
Cash 100 140 40 40
Sundry Debtors 200 300 100 50
Stock 200 300 100 50
Total Current Assets 500 740 240 50
Fixed Assets
Land 100 100 - -
Building 300 270 (30) (10)
Plant 300 270 (30) (10)
Furniture 100 140 40 40
Total Fixed Assets 800 780 (20) (2.5)
Total Assets 1300 1520 220 17
 Balance Sheets of M/s Vasanth & Co (P) Ltd as on 31.03.2013 and 2014 (Rs. in Lakh)
(Comparative Balance Sheets: Rs. in Lakh)
2013 2014 Absolute +, - % Increase / Decr
Liabilities
Rs. P Rs. P Rs. P Rs. P
Current Liabilities
Bills Payable 50 75 25 50
Sundry Creditor 150 200 50 33.33
Tax Payable 100 150 50 50
Total Current Liabilities 300 425 125 41.66
Fixed Liabilities
6 % Debentures 100 150 50 50
Total Liabilities 400 575 175 43.75
Capital & Reserves
6 % Pref. Share Capital 300 300 - -
Equity Capital 400 400 - -
Reserves 200 245 45 22.5
Total share holder’s Fund 900 945 45 5
Total Liabilities & Capital 1300 1520 220 17
 2. Common Size Fin.Statements

It Can be prepared by converting the reported figures into %

to some common base.

In the Income Statement the sale figure is assumed to be 100

% and all other figures are expressed as % to the total
 Profit & Loss Account of M/s Radhika enterprises for the years ended on 31-03-2013, 14
(Common Size Statements : Rs. in Lakh)
Dr Cr

2013 2014 Absolute +, - % Increase / Decr

Particulars
Rs. P Rs. P Rs. P Rs. P
Net Sales 800 1000 200 25
Cost of Goods Sold 600 750 (150) 25
Gross Profit 200 250 50 25
Operating Expenses
(-) Administrative Expenses 20 20 - -
(-) Selling Expenses 30 40 (10) 33.33
Total Operating Expenses 50 60 (10) 20
Net Operating Profit 150 190 40 26.67

Profit & Loss Account of M/s Radhika enterprises for the years ended on 31-03-2013, 14
(Common Size Statements : Rs. in Lakh)
Dr

2013 2014
Particulars
Rs. P Rs. P
Net Sales 100 100
Cost of Goods Sold 75 75
Gross Profit 25 25
Operating Expenses
(-) Administrative Expenses 2.50 2
(-) Selling Expenses 3.75 4
Total Operating Expenses 6.25 6
Net Operating Profit 18.75 19
 Interpretation

1. Absolute value of COGS has increased; but its % cost is same.

2. This is why the gross profit is constant at 25 %

3. Absolute value of Admn. Expenses remain the same; but its %

to sales has come down by 5 %

4. This has caused increase in net profit by 0.25 % (i.e., from

18.75 % to 19 %)

5. But selling expenses has increased by 0.25 %.

 Balance Sheets of M/s Vasanth & Co (P) Ltd as on 31.03.2013 and 2014 (Rs. in Lakh)
(Comparative Balance Sheets: Rs. in Lakh)
2013 2014
Assets
Rs. P Rs. P
Current Assets
Cash 7.70 9.21
Sundry Debtors 15.38 19.74
Stock 15.38 19.74
Total Current Assets 38.46 48.69
Fixed Assets
Land 23.07 17.76
Building 23.07 17.76
Plant 7.70 9.21
Furniture 7.70 6.58
Total Fixed Assets 61.54 51.31
Total Assets 100.00 100.00

Current Liabilities
Bills Payable 3.84 4.93
Sundry Creditor 11.54 13.16
Tax Payable 7.69 9.86
Total Current Liabilities 23.07 27.95
Fixed Liabilities
6 % Debentures 7.69 9.86
Capital & Reserves
6 % Pref. Share Capital 23.10 19.72
Equity Capital 30.76 26.32
Reserves 15.38 16.15
Total share holder’s Fund 69.24 62.19
Total Liabilities & Capital 100.00 100.00
 Interpretation

1. Per cent of CA to TA has increased from 38.46 to 48.69

2. Per cent of CL to TL has also increased from 23.07 to 27.95

3. Proportionate increase of CA is higher (10 %) than that of CL

(5 %), so financially the business is good.

4. This has caused increase in the working capital position also.

(Working Capital : CA – CL)

5. There is a slight deterioration in the debt equity ratio as

proportion of Shareholder’s fund to TL has come down (69.24 to
62.19) that of debenture holder’s has gone up (7.69 to 9.86).
 Liquidity Ratios

1. Current ratio: Current Assets / Current liability (Ideal is 2)

Sundry Debtors 40,000 Sundry Creditor 20,000

Prepaid Expenses 20,000 Debentures 1,00,000
ST Investments 10,000 Inventories 20,000
Machinery 5000 Outst. Expenses 20,000
Bills Payable 10000 Bank OD 10,000

Current Assets / Current liability = 90,000 / 60,000 = 1.5

If it is 5: 1 what do you understand?, good or bad?

 Liquidity Ratios

2. Quick ratio: Quick Assets / Current liability (Ideal is 1)

Sundry Debtors 40,000 Sundry Creditor 20,000

Prepaid Expenses 20,000 Debentures 1,00,000
ST Investments 10,000 Inventories 20,000
Machinery 5000 Outst. Expenses 20,000
Bills Payable 10000 Bank OD 10,000

Quick Assets / Current liability

= (90,000-40000) / 60,000 = 50000/ 60000 = 0.83

QA = CA – Inventories & PP/Exp

QL = CL – OD & Cash Credit
 Liquidity Ratios

3. Super Quick ratio: SQ Assets / Cur. Liability (Ideal is ½)

Sundry Debtors 40,000 Sundry Creditor 20,000

Prepaid Expenses 20,000 Debentures 1,00,000
ST Investments 10,000 Inventories 20,000
Machinery 5000 Outst. Expenses 20,000
Bills Payable 10000 Bank OD 10,000

Super Quick Assets / Current liability

= (50,000-40000) / 60,000 = 10000/ 60000 = 0.17

SQA = Cash & Marketable Securities only

 Profitability Ratios

1. ROI (or) Over all Profitability Ratio

Operating Profit / Capital employed x 100

Capital Employed:
(Share Capital + Reserves & Surpluses + LT Loans) -
(Non business assets + Fictitious assets)

Operating Profit: EBIT

 Profitability Ratios

1. Gross Profit ratio : Gross Profit / Net sales x 100

2. Net Profit ratio : Net Operating Profit / Net sales x 100

(NOP = Gross Profit – Net Operating Expenses)

3. Earning Per Share (EPS): NP after Tax & Pref. Share Div /
No. of Equity shares

4. Pay out ratio: DPS/ EPS

5. Dividend Yield ratio: DPS / Market Price Per Share x 100

 Fund Flow Analysis

1. Any increase or decrease in working capital if called as FF

2. Working Capital may be Gross (CA only) or Net (CA-CL)

3. Assets & Liabilities may be (current / Non current)

4. Buying a machine for Rs.2 Lakh by raising a debenture &

raising a LT Loan to pay this debenture all could not be clearly
traced from Balance sheet.

5. A FFS help us to locate them, it locates sources of funds,

applications of funds and change in working capital.

6. Non fund transaction means ‘fund’ is not affected by that

transaction. (Ex: purchase of machine by issuing shares)
 Fund Flow Analysis

Flow of funds will be there if transactions involve,

1. CA & FA (Building purchase by cash)
2. CA & Capital (Issue of shares for cash)
3. CA & FL (Redemption of dentures in cash)
4. CL & FL (Creditors paid via debentures)
5. CL & Capital (Creditors paid via shares issue)
6. CL & FA (Building transferred to creditors)

Flow of funds will not be there if transactions involve,

1. CA & CL (Creditors paid by cash)
2. FA & FL (Building bought via debentures)
3. FA & Capital (building purchased via shares issue)

Short cut: If journal entry has only Current & only Fixed,
we can say there is no flow of funds. Cross
transaction means there is a fund flow.
 FFS Technique

Prepare the ‘Schedule of Change in working Capital’

1. Increase in CA (Increase in WC)
2. Decrease in CA (Decrease in WC)
3. Increase in CL (Decrease in WC)
4. Decrease in CL (Increase in WC)

Change
Items
Increase Decrease
Current Assets
Cash XXX XXX
Bank Balance XXX XXX
Marketable Securities XXX XXX
A/c Receivables XXX XXX
Stock in trade XXX XXX
Prepaid expenses XXX XXX
Current Liabilities
Bank OD XXX XXX
Outstanding expenses XXX XXX
A/c Payables XXX XXX
Total XXX XXX
Net Increase or Decrease in WC XXX XXX
 Funds Flow Statement

While preparing FFS, ignore CA & CL (Take only FA & FL)

Funds Flow Statement
Particulars Amount Rs.
Sources of Funds
Issue of shares XXXX
Issue of Debentures XXXX
LT Borrowings XXXX
Sale of fixed assets XXXX
Operating profit XXXX
Total XXXX
Applications of funds
Redemption of pref shares XXXX
Redemption of debentures XXXX
payment of LT loans XXXX
Purchase if fixed assets XXXX
operating loss XXXX
payment of dividend, Tax, etc XXXX
Total XXXX
Net increase / decrease in WC XXXX
 Funds Flow Statement

Schedule and FFS must Tally

BALANCE SHEET

AS on 31 Dec AS on 31 Dec
Liabilities Assets
2013 2014 2013 2014
Share capital 10000 15000 Fixed assets 10000 20000
Profit & Loss A/c 4000 6000 Current Assets 13000 14500
Provision for Tax 2000 3000
Proposed dividend 1000 1500
Sundry creditor 4000 6000
Outstanding expenses 2000 3000
Total 23000 34500 Total 23000 34500
Addl Information
Tax paid during 2014 is Rs 2500, Dividend paid during 2014 is Rs.1000
 Funds Flow Statement

Schedule and FFS must Tally

Change
Items
Increase Decrease
Current Assets 1500
Current Liabilities
Sundry creditors 2000
Outstanding expenses 1000
Provision for tax 1000
Provision for dividend 500
Net Decrease in WC 3000
Total 4500 4500
 Funds Flow Statement

Schedule and FFS must Tally

Funds Flow Statement

Particulars Amount Rs.
Sources of Funds
Issue of shares 5000

Funds from operation (P&L Diff) 2000

Total 7000
Applications of funds
Purchase of FA 10,000
Decrease in working capital 3000