364 Accountancy

3 Meaning, characteristic, need and structure of the balance sheet : The balance
sheet is a statement of assets and liabilities of a business enterprise and shows
the financial position at a given date Informations contained in a balance sheet
is true only on that date. The balance sheet is a part of the final account. But it
is not an account, it is only a statement. In a balance sheet the totals of assets
and liabilities are always equal. It portrays the accounting equation.
A balance sheet has to be prepared to know the financial position of the
business, and the nature and values of its assets and liabilities. All the accounts
which have not been closed till the preparation of the profit and loss account
are shown in the balance sheet. Assets and liabilities shown in the balance
sheet are marshalled in order of liquidity or in order of permanence.

Questions for Practice

Short Answers
1. What are the objectives of preparing financial statements ?
2. What is the purpose of preparing trading and profit and loss account?
3. Explain the concept of cost of goods sold?
4. What is a balance sheet. What are its characteristics?
5. Distinguish between capital and revenue expenditure and state whether the
following statements are items of capital or revenue expenditure :
(a) Expenditure incurred on repairs and whitewashing at the time of
purchase of an old building in order to make it usable.
(b) Expenditure incurred to provide one more exit in a cinema hall in
compliance with a government order.
(a) Registration fees paid at the time of purchase of a building
(b) Expenditure incurred in the maintenance of a tea garden which will
produce tea after four years.
(c) Depreciation charged on a plant.
(d) The expenditure incurred in erecting a platform on which a machine will
be fixed.
(e) Advertising expenditure, the benefits of which will last for four years.
6. What is an operating profit?

Long Answars
1. What are financial statements? What information do they provide.
2. What are closing entries? Give four examples of closing entries.
3. Discuss the need of preparing a balance sheet.
4. What is meant by Grouping and Marshalling of assets and liabilities. Explain
the ways in which a balance sheet may be marshalled.

Numerical Questions
1. From the following balances taken from the books of Simmi and Vimmi Ltd.
for the year ending March 31, 2003, calculate the gross profit.
(Rs.)
Closing stock 2,50,000
Net sales during the year 40,00,000
Net purchases during the year 15,00,000
Financial Statements - I 365

Opening stock 15,00,000

Direct expenses 80,000
(Ans. Gross profit Rs.11,70,000)
2. From the following balances extracted from the books of M/s Ahuja and
Nanda. Calculate the amount of :
(a) Cost of goods available for sale
(b) Cost of goods sold during the year
(c) Gross Profit
Rs.
Opening stock 25,000
Credit purchases 7,50,000
Cash purchases 3,00,000
Credit sales 12,00,000
Cash sales 4,00,000
Wages 1,00,000
Salaries 1,40,000
Closing stock 30,000
Sales return 50,000
Purchases return 10,000
(Ans. (a) Rs. 11,65,000 ; (b) Rs.11,35,000 ; (c) Rs.4,15,000
3. Calculate the amount of gross profit and operating profit on the basis of the
following balances extracted from the books of M/s Rajiv & Sons for the year
ended March 31, 2005.
Rs.
Opening stock 50,000
Net sales 11,00,000
Net purchases 6,00,000
Direct expenses 60,000
Administration expenses 45,000
Selling and distribution expenses 65,000
Loss due to fire 20,000
Closing stock 70,000
(Ans. Gross profit Rs.4,60,000, Operating profit Rs.3,50,000)
4. Operating profit earned by M/s Arora & Sachdeva in 2005-06 was
Rs.17,00,000. Its non-operating incomes were Rs.1,50,000 and non-operating
expenses were Rs.3,75,000. Calculate the amount of net profit earned by the
firm.
(Ans. Net profit Rs.14,75,000)
5. The following are the extracts from the trial balance of M/s Bhola & Sons as
on March 31, 2005
Account title Debit Credit
Rs. Rs.
Opening stock 2,00,000
Purchases 8,10,000
Sales 10,10,000
10,10,000 10,10,000

(only relevant items)

Closing Stock as on date was valued at Rs.3,00,000.
366 Accountancy

You are required to record the necessary journal entries and show how the
above items will appear in the trading and profit and loss account and balance
sheet of M/s Bhola & Sons.
6. Prepare trading and profit and loss account and balance sheet as on
March 31, 2005 :

Account Title Amount Account Title Amount

Rs. Rs.
Machinery 27,000 Capital 60,000
Sundry debtors 21,600 Bills payable 2,800
Drawings 2,700 Sundry creditors 1,400
Purchases 58,500 Sales 73,500
Wages 15,000
Sundry expenses 600
Rent & taxes 1,350
Carriage inwards 450
Bank 4,500
Openings stock 6,000

Closing stock as on March 31, 2005 Rs.22,400

[Ans. Gross profit Rs.15,950, Net profit Rs.14,000, Total balance sheet
Rs.75,500]
7. The following trial balance is extracted from the books of M/s Ram on March
31, 2005. You are required to prepare trading and profit and loss account
and the balance sheet as on date :

Account title Amount Account title Amount

Rs. Rs.
Debtors 12,000 Apprenticeship premium 5,000
Purchases 50,000 Loan 10,000
Coal, gas and water 6,000 Bank overdraft 1,000
Factory wages 11,000 Sales 80,000
Salaries 9,000 Creditors 13,000
Rent 4,000 Capital 20,000
Discount 3,000
Advertisement 500
Drawings 1,000
Loan 6,000
Petty cash 500
Sales return 1,000
Machinery 5,000
Land and building 10,000
Income tax 100
Furniture 9,900

(Ans. Gross profit: Rs. 12,000, Net profit: Rs. 500, Total balance sheet:
Rs. 43,400)
Financial Statements - I 367

8. The following is the trial balance of Manju Chawla on March 31, 2005. You
are required to prepare trading and profit and loss account and a balance
sheet as on date :

Account title Debit Credit

Amount Amount
Rs. Rs.
Opening stock 10,000
Purchases and sales 40,000 80,000
Returns 200 600
Productive wages 6,000
Dock and Clearing charges 4,000
Donation and charity 600
Delivery van expenses 6,000
Lighting 500
Sales tax collected 1,000
Bad debts 600
Misc. incomes 6,000
Rent from tenants 2,000
Royalty 4,000
Capital 40,000
Drawings 2,000
Debtors and Creditors 6,0000 7,000
Cash 3,000
Investment 6,000
Patents 4,000
Land and Machinery 43,000

Closing stock Rs. 2,000.

(Ans. Gross Profit: Rs. 18,400, Net profit: Rs. 18,700, Total balance sheet:
Rs. 64,700)
9. The following is the trial balance of Mr. Deepak as on March 31, 2005. You
are required to prepare trading account, profit and loss account and a balance
sheet as on date :

Account title Debit Account title Credit

Amount Amount
Rs. Rs.
Drawings 36,000 Capital 2,50000
Insurance 3,000 Bills payable 3,600
General expenses 29,000 Creditors 50,000
Rent and taxes 14,400 Discount recived 10,400
Lighting (factory) 2,800 Purchases return 8,000
Travelling expenses 7,400 Sales 4,40,000
Cash in hand 12,600
Bills receivable 5,000
368 Accountancy

Sundry debtors 1,04,000

Furniture 16,000
Plant and Machinery 1,80,000
Opening stock 40,000
Purchases 1,60,000
Sales return 6,000
Carriage inwards 7,200
Carriage outwards 1,600
Wages 84,000
Salaries 53,000

Closing stock Rs. 35,000.

(Ans. Gross profit: Rs.1,83,000, Net profit : Rs. 85,000, Total balance sheet:
Rs. 3,52,600)
10. Prepare trading and profit and loss account and balance sheet from the
following particulars as on March 31, 2005.

Account T itle Debit Credit

Amount Amount
Rs. Rs.

Purchases and Sales 3,52,000 5,60,000

Return inwards and Return outwards 9,600 12,000
Carriage inwards 7,000
Carriage outwards 3,360
Fuel and power 24,800
Opening stock 57,600
Bad debts 9,950
Debtors and Creditors 1,31,200 48,000
Capital 3,48,000
Investment 32,000
Interest on investment 3,200
Loan 16,000
Repairs 2,400
General expenses 17,000
Wages and salaries 28,800
Land and buildings 2,88,000
Cash in hand 32,000
Miscellaneous receipts 160
Sales tax collected 8,350

Closing stock Rs. 30,000.

(Ans. Gross profit: Rs. 1,22,200, Net profit : Rs.92,850, Total balance sheet:
Rs.5,13,200)
11. From the following trial balance of Mr. A. Lal, prepare trading, profit and loss
account and balance sheet as on March 31, 2005
Financial Statements - I 369

Account T itle Debit Credit

Amount Amount
Rs. Rs.
Stock as on April 01, 2005 16,000
Purchases and Sales 67,600 1,12,000
Returns inwards and outwards 4,600 3,200
Carriage inwards 1,400
General expenses 2,400
Bad debts 600
Discount received 1,400
Bank over draft 10,000
Interest on bank overdraft 600
Commission received 1,800
Insurance and taxes 4,000
Scooter expenses 200
Salaries 8,800
Cash in hand 4,000
Scooter 8,000
Furniture 5,200
Building 65,000
Debtors and Creditors 6,000 16,000
Capital 50,000

Closing stock Rs. 15,000.

(Ans. Gross profit : Rs. 40,600, Net profit: Rs. 27,200, Total balance sheet:
Rs. 1,03,200)
12. Prepare trading and profit and loss account and balance sheet of M/s Royal
Traders from the following balances as on March 31, 2005.

Debit balances Amount Credit balances Amount

Rs. Rs.
Stock 20,000 Sales 2,45,000
Cash 5,000 Creditors 10,000
Bank 10,000 Bills payable 4,000
Carriage on purchases 1,500 Capital 2,00,000
Purchases 1,90,000
Drawings 9,000
Wages 55,000
Machinery 1,00,000
Debtors 27,000
Postage 300
Sundry expenses 1,700
Rent 4,500
Furniture 35,000

Closing stock Rs.8,000

(Ans. Gross loss Rs. 13,500, Net loss Rs. 20,000, Total balance sheet
Rs. 1,85,000)
370 Accountancy

13. Prepare trading and profit and loss account from the following particulars of
M/s Neema Traders as on March 31, 2005.

Account Title Debit Account Title Credit

Amount Amount
Rs. Rs.
Buildings 23,000 Sales 1,80,000
Plant 16,930 Loan 8,000
Carriage inwards 1,000 Bills payable 2,520
Wages 3,300 Bank overdraft 4,720
Purchases 1,64,000 Creditors 8,000
Sales return 1,820 Capital 2,36,000
Opening stock 9,000 Purchases return 1,910
Machinery 2,10,940
Insurance 1,610
Interest 1,100
Bad debts 250
Postage 300
Discount 1,000
Salaries 3,000
Debtors 3,900

Stock on March 31, 2005 Rs.16,000.

(Ans. Gross profit Rs.17,850, Net profit Rs. 10,590, Total of balance
sheet Rs.2,69,830)
14. From the following balances of M/s Nilu Sarees as on March 31, 2005. Prepare
trading and profit and loss account and balance sheet as on date.
Account Title Debit Account Title Credit
Amount Amount
Rs. Rs.
Opening stock 10,000 Sales 2,28,000
Purchases 78,000 Capital 70,000
Carriage inwards 2,500 Interest 7,000
Salaries 30,000 Commission 8,000
Commission 10,000 Creditors 28,000
Wages 11,000 Bills payable 2,370
Rent & taxes 2,800
Repairs 5,000
Telephone expenses 1,400
Legal charges 1,500
Sundry expenses 2,500
cash in hand 12,000
Debtors 30,000
Machinery 60,000
Investments 90,000
Drawings 18,000
Financial Statements - I 371

Closing stock as on March 31, 2005 Rs.22,000.

(Ans. Gross profit Rs. 1,56,500, Net profit Rs. 1,10,300, Total balance
sheet Rs.2,14,000)
15. Prepare trading and profit and loss account of M/s Sports Equipments for
the year ended March 31, 2006 and balance sheet as on that date :

Account T itle Debit Credit

Amount Amount
Rs. Rs.
Opening stock 50,000
Purchases and sales 3,50,000 4,21,000
Sales returns 5,000
Capital 3,00,000
Commission 4,000
Creditors 1,00,000
Bank overdraft 28,000
Cash in hand 32,000
Furniture 1,28,000
Debtors 1,40,000
Plants 60,000
Carriage on purchases 12,000
Wages 8,000
Rent 15,000
Bad debts 7,000
Drawings 24,000
Stationery 6,000
Travelling expenses 2,000
Insurance 7,000
Discount 5,000
Office expenses 2,000

Closing stock as on March 31, 2006 Rs.2,500

(Ans. Gross loss Rs. 1,500, Net loss Rs. 41,500 , Total balance sheet
Rs.3,62,500)

Checklist to Test Your Understanding

1. Test Your Understanding - I
I (i) T (ii) T (iii) F (iv) T
II (i) b (ii) a (iii) e (iv) c (v) d
2. Test Your Understanding - II
1. (v) 2. (iii) 3. (iii) 4. (iii)