NCERT Solutions Class 11 Accountancy Chapter 10

Q.1 Why is it necessary to record the adjusting entries in the preparation of final accounts?

Ans.

Accrual concept is the fundamental accounting concept and requires that all expenses, whether paid or not and all incomes and gains whether received or not, should be accounted to ascertain correct profit or loss, assets and liabilities. They are recorded through the adjustment entries.

Q.2 What is meant by closing stock? Show its treatment in final accounts?

Ans.

Closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. It is valued at cost or net realizable value (market value) whichever is less.

Closing stock given outside the Trial Balance is shown on the credit side of the Trading Account and also on the assets side of the Balance Sheet under the main head Current Assets.

Q.3 State the meaning of:

1. Outstanding expenses
2. Prepaid expenses
3. Income received in advance
4. Accrued income

Ans.

a) Outstanding expenses:

At the end of the accounting period sometimes a business enterprises is left with some unpaid expenses due to one reason or another. Such expenses are termed as outstanding expenses.

b) Prepaid Expenses:

Prepaid expenses are the expenses that have been paid but their benefit will not be exhausted in current accounting period but in next year.

c) Income received in advance:

Income received in advance represents income that has been received against which services are yet to be rendered or goods are yet to be sold.

d) Accrued Income:

These are certain items are received by a business enterprise but the whole amount of it does not belong to the next period. The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.

Q.4 Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

Ans.

Provision for doubtful debts is the amount set aside out of profits to meet future bad debts out of present doubtful debts.

Provision created for doubtful debts at the end of a particular year will be carried forward to the next year and it will be used for meeting the loss due to bad debts incurred during the next year. The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision

Q.5 What adjusting entries would you record for the following?

1. Depreciation
2. Discount on debtors
3. Interest on capital
4. Manager’s commission

Ans.

a) Depreciation:

Depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expenses and is debited to profit and loss account.

The entry for providing depreciation is:

b) Discount on Debtors:

A business enterprise allows discount to its debtors to encourage prompt payments.

Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts.

The following entry:

In the balance sheet, it will be shown as a deduction from the debtors account.

c) Interest on Capital:

Interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business.

Entry:

In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the Balance Sheet.

d) Manager’s Commission:

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission.

The managers commission will be adjusted in the books of accounts are:

Q.6 What is meant by provision for discount on debtors?

Ans.

Provision for discount on Debtors means provision made for discount that is likely to be allowed to the debtors. It is calculated as a percentage of debtors.

Q.7 Give the journal entries for the following adjustments:

1. Outstanding salary ₹3,500.
2. Rent unpaid for one month at ₹6,000 per annum.
3. Insurance prepaid for a quarter at ₹16,000 per annum.
4. Purchase of furniture costing ₹7,000 entered in the purchase book.

Ans.

a) Outstanding salary: ₹3,500.

Entry:

b) Rent unpaid for one month at ₹6,000 per annum.

Entry:

c) Insurance prepaid for a quarter at ₹16,000 per annum.

Entry:

d) Purchase of furniture costing ₹7,000 entered in the purchase book.

Entry:

Q.8 What are adjusting entries? Why are they necessary for preparing final accounts?

Ans.

Adjustment entries are the entries passed to record expenses and incomes that relate to the accounting period are yet to be paid or received.

According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during that year. Such items duly adjusted, the final accounts will not reflect the true and fair view of the state of affairs of the business.

All expenses and incomes for the year for which accounts are being prepared are accounted. Therefore it is necessary that:

• Expenditure incurred whether paid or not, are accounted.
• Income earned whether received or not, are accounted.
• Expenditure relating to the succeeding years are excluded, and
• Income relating to the succeeding years are excluded.

The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are:

• Closing stock
• Outstanding/expenses.
• Prepaid/Unexpired expenses.
• Accrued Income.
• Income Received in advance.
• Depreciation.
• Bad debts.
• Provision for doubtful debts.
• Provision for discount on debtors.
• Manager’s Commission and
• Interest on capital.

Q.9 What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?

Ans.

Provision for doubtful debts is the amount set aside out of profits to meet future bad debts out of present doubtful debts.

It means provision made against debts of the amount that are doubtful of recovery.

The entry for providing for doubtful debts is:

Debit to the Profit and loss account will reduce the year’s profit by the amount of provision and the amount will be carried forward to the next year. Next year, when bad debts actually occur and are written off, Bad debts account will be debited to the provision for doubtful debts account. The amount of the bad debts will not be debited to the Profit and Loss account since a debit was already given for it last year.

It should be noted that the customer’s account or sundry debtors account is not affected by creating Provision for Doubtful Debts.

Provision for Doubtful Debts Account is shown in the Balance Sheet by way of deduction from the amount of book debts.

Provision created for doubtful debts at the end of a particular year will be carried forward to the next year and it will be used for meeting the loss due to bad debts incurred during the next year.

The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision. When such a provision already exists, the loss due to bad debts during the current year are adjusted against the same and while making provision for doubtful debts required at the end of the current year is called new provision. The balance of old provision as given in trial balance should also be taken into account.

Q.10 Show the treatment of prepaid expenses, depreciation, closing stock at the time of preparation of final accounts when:

1. When given inside the trial balance?
2. When given outside the trial balance?

Ans.

Prepaid Expenses:

When given inside the trial balance:

In this case, the adjustment entry for prepaid expenses is already passed. So it will be shown only in the Balance Sheet as Current Assets.

When given outside the trial balance:

Prepaid insurance is shown on the assets side of Balance Sheet as a separate item under Current Assets.

Next year, prepaid expenses is transferred to the expenses account. This principle applies to all expenses incurred during the year but whose benefit will accrue in the next year.

Depreciation:

When given inside the trial balance:

Depreciation given in the Trial Balance means entry for depreciation is passed in the books of accounts. It, therefore means that the concerned asset appears as its reduced value since the Depreciation amount is credited to it. Depreciation Account is transferred to the debit side of the Profit and Loss Account like other expenses.

When given outside the trial balance:

Depreciation given as an adjustment means that depreciation is yet to be accounted in the books of accounts.

Closing Stock:

Closing stock will appear on the assets side of the Balance Sheet in both the cases: (a) when it is shown in trial balance, and (b) when it is shown outside the trial balance. But it is shown in the Trading Account (Credit side) when its adjustment is shown outside the Trial Balance.

Q.11 Prepare a trading and profit and loss account for the year ending March 31, 2017. From the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year.

Adjustments:
1. Commission received in advance ₹1,000.
2. Rent receivable ₹2,000.
3. Salary outstanding ₹1,000 and insurance prepaid ₹800.
4. Further bad debts ₹1,000 and provision for doubtful debts @5% on debtors and discount on debtors @2%.
5. Closing stock ₹32,000
6. Depreciation on building @6% p.a.

Ans.

Working Note:

Q.12 Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending March 31, 2017 from the following figures taken from his trial balance:

Adjustments:
1. Depreciation charged on machinery @5% p.a.
2. Further bad debts ₹1,500. Discount on debtors @5% and make a provision on debtors @6%.
3. Wages prepaid ₹1,000.
4. Interest on investment @5% p.a.
5. Closing stock ₹10,000.

Ans.

Working Note:

Q.13 The following balances has been extracted from the trial of M/s Runway Shine Ltd. Prepare a trading and profit and loss account and a balance sheet as on March 31, 2017.

Adjustments:
1. Further bad debts ₹1,000. Discount on debtors ₹500 and make a provision on debtors @ 5%.
2. Interest received on investment @5%.
3. Wages and interest outstanding ₹100 and ₹200 respectively.
4. Depreciation charged on motor car @5% p.a.
5. Closing Stock ₹32,500.

Ans.

Q.14 From the following Trial Balance you are required to prepare trading and profit and loss account for the year ending March 31, 2017 and Balance Sheet on that date.

Adjustments
1. Closing stock valued at ₹36,000.
2. Private purchases amounting to ₹5,000 debited to purchases account.
3. Provision for doubtful debts @ 5% on debtors.
4. Sign board costing ₹4,000 includes in advertising.
5. Depreciate furniture by 10%.

Ans.

Q.15 From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending March 31, 2017:

Adjustments:
1. Closing stock was ₹ 45,000.
2. Provision for doubtful debts is to be maintained @2% on debtors.
3. Depreciation charged on: furniture and fixture @5%, plant and machinery @6% and motor car @10%.
4. A machine of ₹ 30,000 was purchased on October 01, 2016.
5. The manager is entitle to a commission of @10% of the net profit after charging such commission.

Ans.

Working Note:

\begin{array}{l}\text{1}\text{.}\\ \text{Depreciation on Plant and machinery}\\ \text{₹30,000 Machinery was purchased on 1 October, 2016}\text{.}\\ \text{Hence, Dep on ₹70,000 (1,00,000 – 30,000) @ 6\% = ₹4,200}\\ \text{and Dep on ₹30,000 @ 6\% for six months = ₹900}\\ \text{= ₹(4,200 + 900) = ₹5,100}\end{array} $\begin{array}{l}\text{2}\text{.}\\ \text{Profit before Manager’s Commission:}\\ \text{= (1,03,400 – 27,600) = ₹75,800}\text{.}\\ \text{manager is entitled to a commission @10\% on the new profit}\\ \text{after charging such commission = ₹75,800 ×}\frac{\text{10}}{\text{110}}\text{= ₹6,891}\end{array}$

Q.16 Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd. from the following particulars:

Adjustments:
1. Closing stock was valued ₹35,000.
2. Depreciation charged on furniture and fixture @5%.
3. Further bad debts ₹1,000. Make a provision for bad debts @5% on sundry debtors.
4. Depreciation charged on motor car @10%.
5. Interest on drawing @6%.
6. Rent, rates and taxes was outstanding ₹200.
7. Discount on debtors 2%.

Ans.

Note: Freight and carriage on Sales or Carriage outward ₹2,250 is an indirect expense.

Working Note:

Q.17 Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as on March 31, 2017.

The following additional information is available:
1. Stock on March 31, 2017 was ₹ 30,000.
2. Depreciation is to be charged on building at 5% and motor van at 10%.
3. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.
4. Unexpired insurance was ₹ 600.
5. The manager is entitled to a commission @5% on net profit after charging such commission.

Ans.

1,269

To Net profit

25,381

57,600

57,600

Q.18 From the following balances extracted from the books of Raga Ltd. prepare a trading and profit and loss account for the year ended March 31, 2017 and a balance sheet as on that date.

The additional information is as under:
1. Closing stock was valued at the end of the year ₹20,000.
2. Depreciation on plant and machinery charged at 5% and land and building at 10%.
3. Discount on debtors at 3%.
4. Make a provision at 5% on debtors for doubtful debts.
5. Salary outstanding was ₹100 and wages prepaid was ₹40.
6. The manager is entitled a commission of 5% on net profit after charging such commission.

Ans.

Q.19 From the following balances of M/s Jyoti Exports. Prepare trading and profit and loss account for the year ended March 31, 2017 and balance sheet as on this date.

Closing stock ₹10,000.
1. To provision for doubtful debts is to be maintained at 5% on sundry debtors.
2. Wages amounting to ₹500 and salary amounting to ₹350 are outstanding.
3. Factory rent prepaid ₹100.
4. Depreciation charged on Plant & machinery @5% and Building @10%.
5. Outstanding insurance ₹100.

Ans.

Note: As per solution Net Profit is ₹15,890 and Total of the Balance Sheet is ₹76,940. However, textbook shows Net Profit ₹15,895 and Total of the Balance Sheet ₹76,945.

Q.20 The following balances have been extracted from the books of M/s Green House for the year ended March 31, 2017. Prepare trading and profit and loss account and balance sheet as on this date.

Adjustments:

1. Machinery is depreciated at 10% and buildings depreciated at 6%.
2. Interest on capital @ 4%.
3. Outstanding wages ₹50.
4. Closing stock ₹50,000.

Ans.

Q.21 From the following balances extracted from the book of M/s Manju Chawla on March 31, 2017. You are requested to prepare the trading and profit and loss account and a balance sheet as on this date.

Closing stock was ₹2,000.

1. Interest on drawings @ 7% and interest on capital @5%.
2. Land & Machinery is depreciated at 5%.
3. Interest on investment @6%.
4. Unexpired rent ₹100.
5. Charge 5% depreciation on furniture.

Ans.

Note:

As per solution Gross Profit is ₹22,400 However, textbook shows ₹21,900.
As per solution Net Profit is ₹24,985 However, textbook shows ₹25,185.
As per solution Total of Balance Sheet is ₹72,945 However, textbook shows ₹71,185.

Q.22 The following balances were extracted from the books of M/s Panchsheel Garments on March 31, 2017.

Prepare the trading and profit and loss account for the year ended March 31, 2017 and a balance sheet as on that date:
(a) Unexpired insurance ₹ 1,000.
(b) Salary due but not paid ₹ 1,800.
(c) Wages outstanding ₹ 200.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated @10%.
Closing stock ₹ 15,000.

Ans.

Q.23 Prepare the trading and profit and loss account and balance sheet of M/s Control Device India on March 31, 2017 from the following balance as on that date.

Closing stock was valued ₹20,000.

1. Interest on capital @10%.
2. Interest on drawings @5%.
3. Wages outstanding ₹50.
4. Outstanding salary ₹20.
5. Provide depreciation @5% on plant and machinery.
6. Make a 5% provision on debtors.

Ans.

Q.24 The following balances appeared in the trial balance of M/s Kapil Traders as on March 31, 2017:
Sundry debtors: ₹30,500
Bad debts: ₹500
Provision for doubtful debts: ₹2,000

The partners of the firm agreed to records the following adjustments in the books of the firm: further bad debts ₹300, Maintain provision for bad debts 10%.

Show the following adjustments in the bad debts account, provision account, debtors account, profit and loss account and balance sheet.

Ans.

Q.25 Prepare the bad debts account, Provision for account, profit and loss account and balance sheet from the following information as on March 31, 2017.
Debtors: ₹80,000
Bad debts: ₹2,000
Provision for doubtful debts: ₹5,000.
Adjustments: Bad debts ₹500. Provision on debtors @3%.

Ans.