Critical points to be remembered

while preparing financial statements

If transactions are recorded correctly, then debit side and credit

side of trial balance will be same. If not recorded at all then debit
side and credit of trial balance will be also same. However,
financial statements will not reflect true picture of the business.

But incorrect recorded transactions will lead to mismatch

between debit side and credit side of trial balance.

1
 There is possibility that some transactions may not have
recorded at all and are given as adjustment under Trial Balance.

 Therefore, while preparing Financial Statements [Statement of

Income and Expenditure (Profit & Loss Account) and Statement
in Sources & Application of Funds (Balance Sheet)], transactions
recorded wrong and /or not recorded at all must be corrected
otherwise financial statement will not be correct.

2
 Financial statements (Statement of income and expenditure,
statement of sources and application of funds and statement of
change in cash flows) are prepared based on Trial Balance).

 Trial Balance is the closing balance of ledger. Ledger book

having debit side greater than credit side, the difference is
called debit balance and is shown in debit column of the Trial
Balance (Example: Cash Book, Expense Book, Other Assets
Book).
3
Similarly, Ledger Book having credit side greater than debit side,
the difference is called credit balance and is shown in credit
column in the Trial Balance (Example: Sales Book, Other Income
Book, Gain, Liabilities).

4
While preparing Financial Statements (P/L Account and Balance
Sheet) based on Trial Balance:

 All the figures shown in Trial Balance will be either shown in

Statement of Income and Expenditure (Profit & Loss Account) or

in Statement in Sources & Application of Funds (Balance Sheet).

 Whereas, transactions shown under adjustment in Trail Balance

will be shown in both profit & loss account and balance sheet
5
FIGURES SHOWN IN TRAIL BALANCE

 All Incomes and Gain, and Expenses and Losses figures are
shown in Profit and Loss Account.

 Incomes and Gains are credited (Added ) in statement of income

and expenditure or Profit & Loss Account while
 Expenses and Losses are debited (deducted from income) in
statement of income and expenditure or Profit & Loss Account.

Crediting Profit & Loss Account INCRASES profit and Debiting Profit
& Loss Account DECREASES Profit. 6
 All Assets, Creditors Liabilities and Capital figures are shown in
Balance Sheet (Statement of Sources & Application of Funds)

where Assets = Liability + Shareholders Capital

 Assets (Fixed Assets, Current Assets, Intangible Assets) are

shown under assets (Application of Funds) of balance sheet.

 Creditors Liabilities (Long Term and Short Term Creditors

Liabilities) are shown under Liabilities of balance sheet.
7
 Capital contributed by owners is shown under Shareholders
Capital in balance sheet.

 Equity shareholders are owners of the business and they have

residual claim over the business. Profit made by the business
during the financial year is added with Shareholders Capital and
is known as Owners Equity (Net Worth).

 Therefore, profit INCREASES Owners Equity or Net Worth

8
 Loss Made by the business during the financial year
is deducted from Shareholders Capital and is known
as Owners Equity (Net Worth).

 Therefore, loss decreases Owners Equity or Net

Worth

9
 FIGURES SHOWN BELOW TRAIL BALANCE
(Adjustments):

Closing stock of inventories (year-end inventories).

 This needs to be deducted from opening stock and

purchase to get consumption. This is done in Profit
and Loss Account

 This needs to be shown as current assets in balance

sheet
10
Material Consumption Calculation
Opening Inventory
Add: New Purchase
Less: Purchase Return
Less Closing Inventory
= Material Consumption

11
There are the transactions which have not been recorded. How to
factor those transactions while preparing Financial Statements?

1) Identify each adjustment transaction’s impact on profit &

Loss Account and Balance Sheet.
2) Add or deduct from respective account.

3) Remember, all adjustments under trail balance will have two

effects i.e. one on Profit & Loss Account and another on
Balance Sheet.

12
Examples of adjustment transactions
under trial balance are:

Expense outstanding / due but not paid / payable.

This has understated expense leading to overstating or inflating
current year’s profit.
What you need to do?
1) You need to increase expense to reduce over stated profit (Add or
increasing expense in Profit & Loss Account or debiting profit &
loss account)
2) You need to added outstanding expenses under current liabilities
in balance sheet.
13
Expense paid in advance (prepaid expenses):
This has overstated expense leading to understating or deflating
current year’s profit.
What you need to do?
1) You need to decrease expense to increase understated profit
(Deduct or decreasing expense in Profit & Loss Account or
crediting profit & loss account)
2) You need to added prepaid expenses under current assets in
balance sheet.
14
Providing / Creating Provision for Doubtful Bad debt:

 Business anticipates future bad debt loss against accounts

receivables (sundry debtors) outstanding and hence, based on
its past experience, business has decided to create provision for
future loss against accounts receivable outstanding.

 This will reduce profit and will also reduce accounts receivable
outstanding.
15
What you need to do:
1) Create percentage of provision for doubtful bad debt against
receivables / sundry debtors and add as loss (provision for loss)
in profit and loss account which will reduce profit.

2) Deduct provision for doubtful bad debt from sundry debtors or

accounts receivable outstanding in balance sheet to reflect net
accounts receivable outstanding.

16
Charging Depreciation against Fixed Assets:
Business has missed out to charge depreciation during the financial
year. Depreciation is a non-cash expense which reduces profit but
does not impact cash flow. Depreciation also reduces book value of
assets
 Missed out to charge depreciation has led to understating
expenses leading to overstating or inflating profit.

 Missed out to charge depreciation has not reduced book value of

assets which it should have been. 17
What you need to do:
1) Increase depreciation as an expense (non-cash expense) in profit
and loss account (debit profit & loss account) to reduce
overstated profit.
2) Deduct depreciation from fixed asset in balance sheet to reduce
book value of fixed assets (net book value)

18
Final Accounts – Practice Problems
with Adjustments
ABC Ltd
Trial Balance for the year ending 31st March 2021
Cash 100000 Sales 1962000
Building 413000 Purchase returns 1950
Salaries 305250 Loan @ 12% borrowed on 01-06-2020 200000
Purchases 1302950 Creditors 303050
Returns inwards / Sales return 32000 Cash discount received 5300
Repairs 16750 Capital 689000
Bad debts 23100
Interest on Loan 6000
Insurance 10000
Rent 21250
Machinery 160000
Debtors 300000
Patents 75000
Copyrights 186000
Goodwill 210000
3161300 3161300
Adjustments
1 Provide depreciation on Building @ 5%
2 Provide depreciation on Machinery @ 10%
3 Outstanding salaries Rs.12000/-
4 Insurance prepaid Rs.2500/-
5 Provide interest on Loan for the period up to 31 st March 2021

You are required to prepare the Profit & Loss Account for the year ended 31st March, 2021 and Balance sheet as
on that date

06/17/2024 BITS Pilani, WILPD

FinalProblem
Accounts – Practice
Solution
Profit and Loss Account of ABC Ltd for the year ended 31st March, 2021

Income
Income from Operations
Sales 1962000
Less Sales Returns -32000 1930000
Other Income
Cash discount received 5300
Total Income 1935300

Expenses
Purchases 1302950
less Purchase returns -1950 1301000
Salaries 305250

Add outstanding Salaries 12000 317250

Rent 21250
Repairs 16750
Bad debts 23100
Insurance premium 10000
Less Prepaid -2500 7500
Interest on Loan 6000
Add outstanding Interest 14000 20000
Depreciation
Machinery 16000
Building 20650 36650
1743500

Net Profit 191800

06/17/2024 BITS Pilani, WILPD

 Balance Sheet–
Practice problem
Balance Sheet of ABC Ltd as at 31st March 2021

Equity & Liabilities

Equity 689000
Net Profit 191800 880800

Liabilities
Loan from bank 200000
Interest Outstanding 14000 214000

Current Liabilities
Sundry creditors (Trade payables) 303050
Outstanding Salaries 12000 315050
Interest Outstanding 14000
1409850
Assets
Fixed Assets
Tangible Assets
Building 413000
Less Depreciation -20650 392350
Machinery 160000
Less Depreciation -16000 144000
Intangible Assets
Patents 75000
Goodwill 210000
Copyrights 186000 471000
Current Assets
Sundry Debtors (Trade receivables) 300000
Cash on Hand 100000
Prepaid Insurance 2500 402500

1409850

06/17/2024 BITS Pilani, WILPD

Workings for Adjustments
Workings for Adjustments

Interest Calculation
24000 Int. for the full year (200000*.12)
20000 For 10 months as Loan is taken on June 1st
-6000 Already paid
14000 Bal to be provided

Depreciation Workings

Machinery 160000
Depreciation @ 10% 16000
Building 413000
Depreciation @ 5% 20650

Outstanding Salaries
Add Rs.12000/- to Salary expenses in the P& A/c and show in the BS on the Liability side as
Outstanding salary

Insurance prepaid
Deduct Rs.2500/- from Insurance expense in P&L A/c and show the same as Prepaid Insurance on the
Asset side of the BS

06/17/2024 BITS Pilani, WILPD

Practice 1: From the following Trial Balance of Woolworths Group
Limited (Australian Company) Ltd. Prepare Statement of Income and
Expenditure for the Year ending 30th June,2020 after giving effect
to under mentioned adjustments.

Trail Balance of Woolworths Group Limited as on 30/06/2020

Identify all incomes
Particulars Dr Cr. and gains to be
Opening stock of inventories 8000 credited, Expenses
Started business with Loan 50000 and Losses to be
Sales 80000 debited to P/L
Purchases 20000 Account.
Purchase Returns 400

Sales returns 1500

Carriage inwards 1200
Identify all assets,
Carriage outwards 2500
Liabilities and
Apprenticeship Premium 1500 Capital to be in B/L
Bills Payable 2500
Sundry Creditors 15800
Wages 3300
Salaries 5500
Rent 1100
Freight 2400
Fire Insurance Premium 900
Bad debts 2100
23
Practice 1: From the following Trial Balance of Woolworths Group
Limited (Australian Company), prepare State of Income and
Expenditure for the year ending 30th June,2020 after giving effect
to under mentioned adjustments.

Discount Allowed to debtors 500 Identify all incomes

Printing & Stationary expenses 250 and gains to be
Rates and Taxes 350 credited, Expenses
Traveling Expenses 150 and Losses to be
debited to P/L
Sundry Trade Expenses 200
Account.
Business Premises 55000
Furniture and Fixtures 2500
Bills Receivable 3000
Sundry Debtors 20000 Identify all assets,
Machinery 4500 Liabilities and
Loan given to Smith 5000 Capital to be in B/L
Investments 3500
Cash in hand 250
Cash at Bank 3500
Proprietor's withdrawals 3000
TOTAL 150200 150200

24
Following transactions were not considered while preparing Trial
Balance

Sr.Following transactions were not considered while preparing Trial Balance

1 Inventory in hand (closing stock of inventories) on 30th June,2020, Rs.7000. 7000
2 Wages to Laborers of Rs.300 for the last month are outstanding. 300
3 Salaries to clerks for the month of June,2020 are outstanding Rs.500. 500
4 Rent of godowns for the last month is outstanding Rs.100. 100
5 Fire Insurance Premium include Rs.600 paid on 17th Jan.,2020, to run for one 300
year from 1st Jan.,2020 to 31st December 2020. (600/2=300)
6 Apprenticeship Premiums are for three years, received in advance on 1st 500
July,2019.
7 A stationary bill for Rs.30 remains unpaid and unrecorded. 30
8 Depreciate: Business Premises by 5%, Furniture & Fixtures by 10%, and
Machinery by 10%.
Business Premises 0.05
Furnitire & Fixtures 0.1
Machinery 0.1

Check the impact of transactions not recorded on P/L A/C and B/L.
Adjust accordingly

25
 Following transactions were not considered while preparing Trail Balance

9 Interest on loan given to Smith’s for one year has accrued at 7% 0.07
10 Interest on Investments (debt securities) Rs.75 has accrued as on 75
30thJune,2019.
11 Interest on Loan capital ( Creditors Liabilities) at 5% for one year. 0.05
12 Interest on Drawings to be charged to owner as ascertained for the 80
year Rs.80.
13 Create a provision on sundry debtors for doubtful debts at 5% and
discount at 3% on debtors
Bad Debt provision 0.05
Provision for Discount 0.03
14 Create a reserve on creditors for discount at 3%. 0.03

Check the impact of transactions not recorded on P/L A/C and B/L.
Adjust accordingly

26
 Statement of Income and Expenditure of Woolworths
Group Limited for the year ending June 30, 2020

Statement of Income and Expenditure for the year ending 30th June 2020
Sales (revenue) 80000
Less: Sales Returns 1500
Total: Income from Operations 78500
Income from Other Sources:
Apprentice Premium 1500
(6) Less: Received in advance 1000 500
(9) Interest @ 7% on 5000 loan given to
Mr. Smith 350
(10) Accrued Interest on Investments 75
(12) Interest on Drawings 80
(14) Reserve for Discount @ 3% on
Creditors 15800 474
Total: Income from Other Sources 1479
Total Income (78500+1479) 79979

27
Statement of Income and Expenditure of Woolworths
Group Limited for the year ending June 30, 2020
REVENUE EXPENDITURE: Net Expense
Opening Stock of Inventory 8000
Purchases during the year 20000
Less: Purchase returns 400
Closing stock of inventory 7000
Material consumed 20600
Carriage inwards 1200
Wages 3300
(2) Add: Wages Outstanding (Add with CL in B/S) 300 3600
Freight 2400
Carriage outwards 2500
Salaries 5500
(3) Add: Outstanding (Add with CL in B/S) 500 6000
Rent 1100
(4) Add: Rent Outstanding (Add with CL in B/S) 100 1200
To Fire Insurance Premium 900
(5) Less: Prepaid (Add with CA in B/S) 300 600
To Bad Debts 2100

28
Statement of Income and Expenditure of Woolworths
Group Limited for the year ending June 30, 2020

Printing & Stationary 250 Net Expense

(7) Add: Printing & Stationary Outstanding 30 280
Rent & Rates 350
To Traveling Expenses 150
To Sundry Trade Expenses 200
(8) To Depreciation on: To be deducted
Business Premises by 5% on 55000 2750 from respective
fixed assets to get
Furniture & Fixtures by 10% on 2500 250 net block in B/S
Packing Machinery by 10% on 4500 450 3450
(11) To Interest on Loan 5% on 50K 2500
(13) To Provision for Doubtful Debts @ 5% on
20000 1000
To Discount Allowed to debtors 500
(13) To Provision for Discount on Debtors @
3% on 19000 (20000-1000) 570 1070
Total Revenue Expenditure 49200
To Net Profit (79979-49200) credited to
Capital A/C 30779

29
Practice 2: From the following Trial Balance of Israelita Albert
Einstein (Brazilian Hospital) Ltd as on 31st December 2001.
Prepare Profit & Loss Account and Balance Sheet

Identify all incomes

and gains to be
Trial Balance of Israelita Albert Einstein Ltd. from credited, Expenses
1st Jan to 31st Dec 2001 and Losses to be
Particulars Dr. Cr. debited to P/L
Capital 25000 Account.
Loans 5000
Sales 35000
Accounts Payable 4000 Identify all assets,
Bills Payable 5000 Liabilities and
Purchase Return 2000 Capital to be in B/L
Dividend Received 3000

30
Practice 2: From the following Trial Balance of Israelita Albert
Einstein (Brazilian Hospital) Ltd as on 31st December 2001.
Prepare Profit & Loss Account and Balance Sheet
Trial Balance of Israelita Albert Einstein Ltd. from 1st Jan to
31st Dec 2001
Particulars Dr. Cr. Identify all incomes
and gains to be
Equipment 13000 credited, Expenses
Buildings 17000 and Losses to be
Accounts Receivable Outstanding (A/R) 9650 debited to P/L
Purchases 18000 Account.
Discount Allowed 1200
Wages 7000
Salaries 3000
Travelling Expense 750 Identify all assets,
Freight 200 Liabilities and
Insurance 300
Capital to be in B/L
Commission Paid 100
Cash on-hand 100
Cash at Bank 1600
Repairs & Maintenance 500
Interest on Loans 600
Opening Inventories 6000
Total 79000 79000

31
 Following Transactions were not recorded in Trial
Balance from 1st Jan to 31st Dec 2001

Closing Stock of Inventories 8000

Depreciation during 2000-01
on Equipment 0.15
on Building 0.1

Provision for doubtful on A/R 500

Insurance Premium Prepaid 50
Rent Outstanding 100

Check the impact of transactions not recorded on P/L A/C and B/L.
Adjust accordingly

32
Statement of Income and Expenditure of Israelita Albert
Einstein Ltd. (Brazilian Hospital) for the year ending
31/12/2001

Statement of Income and Expenditure Israelita Albert Einstein Ltd. for

the year ending 31/12/2001
REVENUE:
Sale (Service) 35000
Income from Operation 35000
Dividend Received 3000
Income from other sources 3000
Total Income (income from operations + Income
from other sources) 38000

REVENUE EXPENDITURE
Opening Inventories 6000
Add: Purchase 18000
Less: Purchase Return 2000
(1) Less: Closing Stock of Inventories 8000
Consumables Consumed 14000
Add with CA in B/S
33
 Statement of Income and Expenditure of Israelita Albert
Einstein Ltd. (Brazilian Hospital) for the year ending
31/12/2001
Wages 7000
Discount Allowed 1200
Salaries Expenses 3000
Travelling Expenses 750
Freight Expenses 200
Insurance Premium Expenses 300
(4) Less: Prepaid (Add with CA in B/S) 50 250
Commission 100
Repairs & Maintenance Expenses 500
Interest on Loan 600
(5) Add Rent Outstanding (Add with CL in B/S) 100
(3) Provision for doubtful debt (Deduct from A/R in B/S) 500
(2) Depreciation
On Plant and Machinery 1950
(Deduct from P/M and
On Bulding 1700 Building in B/S)

Total Expenses 31850

Profit (38000 – 31850) credited to capital account 6150.00

34
Statement of Sources and Application of Funds of Israelita
Albert Einstein Ltd. (Brazilian Hospital) as on 31/12/2001

Sources & Application of Funds as on 31/12/2001

SOURCES OF FUNDS
Capital 25000
Add: Net Profit (Transferred from profit & Loss Account) 6150

Owners Equity (Net Worth) 31150

Creditors Liabilities
Long-term liabilties
Loan from bank 5000
Current Liabilties
Accounts Payable 4000
Bills Payable 5000
Outstanding Rent 100
Total Sources of Funds 45250

35
Statement of Sources and Application of Funds of Israelita
Albert Einstein Ltd. (Brazilian Hospital) as on 31/12/2001

APPLICATION OF FUNDS

Long-Term Assets (Fixed Assets)

Gross Block of Plant and Machinery 13000
Less: Depreciation 1950
Net Block of Plant and Machinery 11050
Gross Block of Building 17000
Less: Depreciation 1700
Net Block of Building 15300

CURRENT ASSETS
Cash on Hand 100
Cash at Bank 1600
Accounts Receivable 9650
Less: Provision for doubtful bad debt 500 9150
Closing stock of inventories 8000
Pre-Paid Insurance Premium 50
Total Application of Funds 45250

Assets = Creditors’ Liability + Owner’s

Capital

36
Practice 3 ( RIL ) : From Trial Balance, prepare P/L
and B/S
Trial Balance as on 31/12/2018 Dr. Cr.
Sales 300000
Equipment 120000
Rent, Rates & Taxes 20000
Sales Return 30000
Freight 4000
Accounts Receivable 70000
Inventories as on 31/12/2017 120000
Purchases 230000
Discount Allowed 5000
Interest on Bank Loan 5000
Salaries 70000
Cash in hand 5000
Purchase Return 10000
Bank Loan 150000
Capital 181500
Accounts Payable 40000
Bills Payable 26000
Legal Charges 500
General Expenses 8000
Cash at Bank 20000
Total 707500 707500 37
Practice 3 : From Trial Balance, prepare P/L and B/S

The following transactions were not recorded

in trial balance
Provision for bad & Doubtful Debts on A/R 5%
Interest on Bank Loan Outstanding 7000
Inventories as on 31/12/20018 120000

38
Statement of Income and Expenditure during 2017-18

Sales 300000
Sales Return 30000
Total Income from operation 270000
Operating / Revenue Expenditure
Inventories as on 31/12/2017 (Opening stock of
inventories) +120000
Purchases +230000
Purchase Return -10000
Inventories as on 31/12/20018 (Closing stock of
inventories) -120000
RM Consumed 220000
Rent, Rates & Taxes 20000
Freight 4000
Discount Allowed 5000
Interest on Bank Loan 5000
Interest on Bank Loan Outstanding 7000
Salaries 70000
Legal Charges 500
General Expenses 8000
Provision for bad & Doubtful Debts on A/R 3500
Total Expenses 343000
-
73000.0
Net Loss debited to capital account 0 39
SOURCES AND APPLICATION OF FUNDS as on 31/03/218

Sources of Funds
Owner's Liability
Capital 181500
Net Loss -73000 Total Assets =
Owners’ Net Worth 108500
Long Term Creditors Liability Creditors
Bank Loan
Short Term Creditors Liability
150000
Liabilities +
Accounts Payable 40000 Owners Capital
(2) Interest on Bank Loan Outstanding 7000
Bills Payable 26000
Total Sources of Funds (Creditors’ Liabilities +
Owners’ Equity) 331500

APPLICATION OF FUNDS
Long-Term Assets (Fixed Assets)
Plant & Machinery 120000
Short-Term Assets (Current Assets)
Accounts Receivable 70000

(1) Provision for bad & Doubtful Debts 5% on 70,000 3500 66500
Cash in hand 5000
Cash at Bank 20000
(3) Inventories as on 31/12/20018 120000
Total Application of Funds (Application of Funds) 331500
40