Session 18 - Preparation of Trading and Profit and Loss account and Balance sheet with adjustment

Practice/Practical/Practicum Session Plan : Preparation of Trading and Profit and Loss account and Balance sheet with adjustment

Introduction (5 min): Explain the need for adjustments (outstanding, prepaid, accrued income, depreciation, provisions, closing stock).

Concepts (10 min): Discuss dual effect of adjustments on Trading A/c, P&L A/c, and Balance Sheet.

Illustration (15 min): Prepare complete Final Accounts with adjustments from a Trial Balance.

Class Activity (10 min): Students solve a problem incorporating adjustments.

Recap & Q/A (5 min): Summarize importance of adjustments in showing true profit & financial position.

Instruction for Practice/Practical/Practicum : (PDF, PPT)

Final_Accounts_Comprehensive_Problem.pptx 

Practice Material (IV Quadrant Approach)

(Q1) : Practice Questions/Problems (PDF Formats)

Practice Problem

Trial Balance (Extract) — 31 Mar 2024

Opening Stock ₹60,000 (Dr)                      Purchases ₹2,30,000 (Dr)

Returns Outward ₹5,000 (Cr)                     Returns Inward ₹8,000 (Dr)

Sales ₹3,50,000 (Cr)                                   Wages ₹18,000 (Dr)

Carriage Inwards ₹7,000 (Dr)                    Carriage Outwards ₹5,000 (Dr)

Salaries ₹24,000 (Dr)                                 Rent ₹12,000 (Dr)

Insurance ₹3,600 (Dr)                                Commission Received ₹4,000 (Cr),

Bad Debts ₹2,000 (Dr)                               Sundry Debtors ₹90,000 (Dr)

Sundry Creditors ₹60,000 (Cr)                   Bills Receivable ₹15,000 (Dr)

Bills Payable ₹10,000 (Cr)                         Machinery ₹1,20,000 (Dr)

Furniture ₹20,000 (Dr)                               Cash at Bank ₹18,000 (Dr)

Capital ₹2,00,000 (Cr)                                Loan from Bank ₹3,600 (Cr).

Adjustments

1. Closing Stock (at cost) ₹80,000.

2. Goods on approval sent at ₹12,000 (selling price) included in Sales and Debtors; cost ₹8,000.

3. Wages outstanding ₹2,000.

4. Rent outstanding ₹1,000; Insurance prepaid ₹600.

5. Depreciation: Machinery 10% p.a.; Furniture 10% p.a.

6. Further Bad Debts ₹1,000; create Provision for Doubtful Debts 5% on adjusted debtors and Provision for Discount on Debtors 2% after that provision.

7. Commission accrued (receivable) ₹1,500.

8. Interest on bank loan @10% p.a. outstanding.

9. Goods withdrawn by proprietor for personal use ₹5,000 (adjust from Purchases → Drawings).

Solution

Working Adjustments (key impacts)

• Goods on approval: Deduct ₹12,000 from Sales and from Debtors; add ₹8,000 to Closing Stock.

• Net Sales = 3,50,000 – 8,000 (returns in) – 12,000 (approval) = ₹3,30,000.

• Net Purchases = 2,30,000 – 5,000 (returns out) – 5,000 (drawings) = ₹2,20,000.

• Direct expenses = Wages (18,000 + 2,000) + Carriage Inwards 7,000 = ₹27,000.

• Closing Stock (adjusted) = 80,000 + 8,000 = ₹88,000.

• Debtors for provisions = 90,000 – 12,000 (approval) – 1,000 (further bad debts) = ₹77,000.

  • Provision for Doubtful Debts = 5% of 77,000 = ₹3,850.

  • Provision for Discount on Debtors = 2% of (77,000 – 3,850) = 2% of 73,150 = ₹1,463.

• Depreciation: Machinery ₹12,000; Furniture ₹2,000.

• Insurance expense = 3,600 – 600 = ₹3,000; Rent expense = 12,000 + 1,000 = ₹13,000.

• Loan interest = 10% of 3,600 = ₹360 (outstanding).

• Commission income = 4,000 + 1,500 = ₹5,500.

(A) Trading Account for year ended 31 Mar 2024

Dr. Cr.

Opening Stock 60,000 Sales (Net) 3,30,000

Purchases (Net) 2,20,000 Closing Stock (Adj.) 88,000

Wages 18,000

Add: Outstanding 2,000 → 20,000

Carriage Inwards 7,000

Total Dr. = 3,07,000       Total Cr. = 4,18,000

Gross Profit c/d = 4,18,000 – 3,07,000 = ₹1,11,000

(B) Profit & Loss Account for year ended 31 Mar 2024

Dr. (Expenses) ₹ Cr. (Incomes) ₹

Carriage Outwards 5,000 Gross Profit b/d 1,11,000

Salaries 24,000 Commission Received 4,000

Rent (12,000 + 1,000) 13,000 Add: Accrued 1,500

Insurance (3,600 – 600) 3,000 Total Commission 5,500

Depreciation – Machinery 12,000

Depreciation – Furniture 2,000

Bad Debts (given) 2,000

Further Bad Debts 1,000

Prov. for Doubtful Debts 3,850

Prov. for Discount on Debtors 1,463

Interest on Loan (outstanding) 360

Total Expenses 67,673

Net Profit = 1,11,000 + 5,500 – 67,673 = ₹48,827

(C) Balance Sheet as at 31 Mar 2024

Liabilities ₹ Assets ₹

Capital 2,00,000 Machinery (1,20,000 – 12,000) 1,08,000

Add: Net Profit 48,827 Furniture (20,000 – 2,000) 18,000

Less: Drawings (goods) (5,000) Closing Stock (adjusted) 88,000

Capital (Adjusted) 2,43,827 Sundry Debtors 77,000 – 3,850 – 1,463 71,687

Sundry Creditors 60,000 Bills Receivable 15,000

Bills Payable 10,000 Cash at Bank 18,000

Bank Loan 3,600 Prepaid Insurance 600

Outstanding Wages 2,000 Accrued Commission 1,500

Outstanding Rent 1,000

Outstanding Interest on Loan 360

Total 3,20,787 Total 3,20,787

Notes & Exam Tips

• Always check goods on approval: reduce Sales & Debtors by selling price; add cost back to stock.

• Create provisions on adjusted debtors (after bad debts & any approval reversal).

• Each adjustment has a dual effect (P&L/Trading and Balance Sheet).

• Don’t forget capital adjustments for drawings in goods.

• Ensure the Balance Sheet tallies after all adjustments.

(Q2) : Video Based Content (Youtube): youtube.com/watch?v=esyJV2SCrY4&list=PLLhSIFfDZcUXEs3UhIv5tMn6AAU1GNnPr&index=39 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform): forms.fillout.com/t/4f7Pa5tBC1us