Final Accounts of Sole Proprietors

8/13/2019 Final Accounts of Sole Proprietors

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Ramanujar Institutional Learning Page 1

Final Accounts of Sole ProprietorsAdjustments at the time of preparation of Final Accounts

Adjustment entries are being passed at the time of preparation of finalaccounts to comply with the basic accounting concepts of periodicity, accrual,matching, conservatism, consistency, materiality, going concern.

All adjustment entries are passed only for complying with the above concepts

at the time of preparation of final accounts for an accounting period. Hence, aftercompletion of the final accounts all the above entries are to be reversed in the nextaccounting year.

1) Closing Stock2) Outstanding Expenses3) Prepaid Expenses4) Income Receivable5) Income received in Advance6) Interest on Capital

7) Interest on Drawings8) Depreciation9) Interest on Loan10) Interest on Investment11) Bad Debts12) Provision for Doubtful Debts13) Provision for Discount on Debtors14) Provision for Discount on Creditors

Closing Stock

Closing Stock is the materials or goods available in hand at the date of closureof books of accounts in usable condition. The materials are the products, assetswhich are kept for the purpose of sales only and they are called as Stock in Trade.The available materials are identified during the time of stock taking at the time ofyear end (Closure of books of Accounts). The materials which are not usable for thefuture are discarded and reduced from the purchase cost.

Entry for Closing Stock is

31st March Closing Stock Account DrTo Trading Account

[Being closing stock accounted for the yearended based on the report on stock verification]

Going Concern – To the extent of Stock in Trade expected to be sold in future areonly accounted as Closing StockCost Concept – All the amount spent for bringing the stock in trade to the currentposition are all added with the value of goods. (Carriage Inward are added with thevalue of the closing stock)Realisation Concept – Closing Stock is to be valued at lower of Cost or Market Price.Even though the cost of the material is high but currently they are not saleable in the

market then they are to be valued at available market price only.






Interest on CapitalInterest on Capital is provided to the owner of the business in lieu of Profit (in

replacement for profit). It is not in addition to profit from the business.During the initial stages of business, expected profit cannot be available from

the business. Hence, a small percentage of interest is provided to the owner of the

business towards his contribution for the business as Capital. Once, the businessstarts earning profit, providing interest on capital will be stopped.

Entry for Interest on Capital 31st March Interest on Capital Account Dr

To Capital Account[Being interest on capital provided to theoutstanding balances of Capital at 6%]

Interest on DrawingsInterest on Drawings is collected from the owner of the business towards the

drawings made by him from the business for his personal use. The drawings may becash or goods. Interest on drawings is collected irrespective of the profit from thebusiness.

Entry for Interest on Drawings 31st March Drawings Account Dr

To Interest on Drawings Account[Being interest on Drawings collected for theoutstanding balances of drawings at 6%]

When there is systematic pattern of drawings, then the interest will be calculated asfollows:

Drawings at the beginning of the monthMonthly Drawings X Rate of Interest X 6.5

Drawings at the middle of the monthMonthly Drawings X Rate of Interest X 6

Drawings at the end of the month

Monthly Drawings X Rate of Interest X 5.5

Interest on Capital and interest on drawings are provided by considering thebusiness and owner as separate based on the concept of business entity.

DepreciationDepreciation is provided as a charge against profit towards the usage of fixed

assets for earning the income. It is the reduction in value of the fixed assets over theperiod of time due to usage, wear and tear, obsolescence, change of model. It is aNon Cash Transaction. No cash goes out of business due to the entry of depreciation.

It is a charge against profit and reduces the profit to the extent of usage of FixedAssets.




It is charged based on the concept of Matching. Every expenses incurred toearn the income for the accounting year should be matched against such income.Depreciation is reduction in value of asset incurred due to usage of asset for earningthe income.

Entry for Depreciation

31st March Depreciation Account DrTo Fixed Assets Account

[Being Depreciation on Fixed Assets charged forthe accounting year]

Alternatively, if the business concern wants to disclose the fixed assets at itsown cost and does not want to reduce its value, the following entry can be passed

Entry for Depreciation 31st March Depreciation Account Dr

To Provision for Depreciation Account[Being Provision for Depreciation on Fixed Assetscreated for the accounting year]

Here, the Fixed Assets will be always shown at Cost in the balance sheet andprovision for depreciation shown as a deduction from the fixed assets.

Fixed Asset at CostLess: Provision for Depreciation

Interest on LoanBased on the concept of accrual, Interest on loan has to be provided for the

entire loan period during the accounting year whether debited by the bank or not. Ifloan is drawn on 01st May, 2012, interest has to be calculated for the loan amountoutstanding from 01st May, 2012 to 31st March, 2013 (if the loan amount is not repaidduring the year).

Entry for Interest on Loan outstanding

31st March Interest on Loan Account DrTo Outstanding Expenses Account

[Being Interest on Loan not debited by bank providedfor the outstanding loan amount]

Entry for actual debit of interest by bank Date ofTransaction

Outstanding Expenses Account Dr

To Bank Account[Being interest on loan for the last accounting yeardebited by bank]




Interest on InvestmentSimilar to interest on loan, interest on investment has also to be accounted for

the entire period of investment whether credited by the bank or not.

Entry for Interest on Investment 31st March Interest Receivable Account /

Accrued Interest AccountDr

To Interest Account[Being Accrued Interest on Investment accounted]

Entry for actual Credit of interest by bank Date ofTransaction

Bank Account Dr

To Interest Receivable Account /Accrued Interest Account

[Being interest receivable received from Bank]

Bad Debts

Bad Debts occur in business due to non payment of due amount by thedebtors. Entry for Bad Debts is not an Adjustment entry. It is passed based on theinstances confirming non recoverability of the due amount from the debtor. Theinstances confirming the non recoverability will be Absconding of the debtor,Insolvency petition by the debtor.

Entry for Bad Debts Date ofTransaction

Bad Debts Account Dr

Recoverable from Court Account Dr

To Sundry Debtors Account[Being entry for Bad Debts passed based on the

Court Order and amount recoverable throughcourt debited to Recoverable Account]

On receipt of Bad Debts from the Debtor after some point of timeEntry for Bad Debts Date ofTransaction

Cash Account Dr

To Bad Debts Recovered Account[Being amount received from the debtorconsidered as Bad Debt earlier]

Provision for Doubtful DebtsBased on the concept of conservatism and prudence, provision for doubtful

debts is to be passed for the outstanding debtors towards expected percentage ofnon recoverability from the outstanding debtors.

The expected percentage is calculated based on past experience.

Entry for Provision for Doubtful Debts 31st March Profit & Loss Account Dr

To Provision for Doubtful Debts Account[Being provision for doubtful debts created on theoutstanding debtors @ 3%]




Every year the created provision has to be checked with the outstandingdebtors for the recoverability. If the expected percentage of non recoverabilityincreases additional provision has to be created and if the expected percentagedecreases, excess provision is to be reversed.

Entry for Additional Provision for Doubtful Debts 31st March Profit & Loss Account Dr

To Provision for Doubtful Debts Account[Being additional provision for doubtful debtscreated on the outstanding debtors]

Entry for Reversal Provision for Doubtful Debts 31st March Provision for Doubtful Debts Account Dr

To Profit & Loss account[Being excess provision for doubtful debts on theoutstanding debtors reversed]

Provision for Discount on DebtorsProvision for Discount on Debtors can be created when we expect that the

debtors will pay their due within due date and ask for discount on prompt payment.To the extent of the discount provided to the debtors, we will receive the amount isshort. Hence, in Balance Sheet debtors are to be reduced to the extent of expecteddiscount to them.

Entry for Provision for Discount on Debtors

31st March Profit & Loss Account DrTo Provision for Discount on Debtors Account

[Being provision for discount on debtors created on theoutstanding debtors @ 1%]

Both the provision for doubtful debts and provision for discount on debtors isto be shown as a reduction from debtors only in Balance Sheet and not reduced fromthe Debtors in the ledger account.

Provision for Discount on CreditorsSimilar to expected discount to be provided to debtors, we can also expect adiscount from our suppliers on prompt payment within due date. It is termed asProvision for Discount on Creditors.

But based on the concept of Conservatism, ”Expect all losses but ignore allexpected income”, the provision for discount on creditors are not accounted.




Questions for Discussion

1) Sundry Debtors ` 55,200; Bad Debts ` 200; Provision for Doubtful Debts 5%;Provision for discount on Debtors 2%. What will be the amount of provision fordiscount on debtors

2) Bad Debts`

3,000; Provision for Bad Debts`

3,500; It is desired to make a provisionof ` 4,000 at the end of the year. The amount debited to Profit & Loss account ?

3) Opening Debtors ` 3,000; Credit Sales ` 80,000; Cash received from Debtors ` 60,000.Closing Debtors ?

4) Opening Balance of Debtors is ` 35,000; Cash received from debtors is ` 30,000; cashsales is ` 20,000 which is 20% of total sales. Bills receivable received for ` 40,000 anddiscount allowed is 1% of cash collection. Find the closing debtors

5) Opening Balance of Cash ` 4,000; Closing balance ` 7,000; Payment to creditors

` 80,000; Bills payable matured ` 6,000; Bills receivable discounted ` 9,000; sundryexpenses ` 3,000; Drawings ` 12,000. What is the amount received from debtors?

6) Net profit before the following adjustments ` 1,80,000; Outstanding salary ` 10,000;Prepaid insurance ` 13,000; Calculate the profit after adjustments

7) Find the corrected net profitProfit before taking into account following adjustments was ` 7,00,000.

i) ` 1,00,000 spent on purchase of motor car for business purpose, treated asexpenses in profit & Loss account

ii) ` 15,000 per month rent outstanding for the month of February and Marchnot taken into account

8) There was a stock of ` 5,500 out of which stock of ` 500 was burnt due to fire andwas disposed off for ` 200. Remaining goods were sold at 25% above cost price.Find net profit

9) Opening Capital ` 5,00,000; Profits during the year ` 1,00,000; Calculate the averagecapital of the year

10) The manager of the firm is entitled to a commission of 10% on net profit after hiscommission. If the net profit of the firm before charging commission is ` 4,40,000,the amount of manager’s commission will be

11) At the end of the year 2012-13, the ledger of a firm shows following balances,prepare their balance sheet-Capital ` 2,00,000Net profit for the year 2012 - 2013 ` 1,50,000Provision for taxes ` 75,000Liabilities ` 1,00,000Advance Tax paid ` 60,000

Sundry Assets ` 4,65,000Total of Balance sheet will be




12) On 31st March, 2013 Ram has loan of ` 50,000 and trade creditors of ` 80,000, fixedassets of ` 72,000, stock ` 90,000 and cash in hand ` 60,000. If he had startedbusiness on 01st April, 2012 with capital of ` 50,000. Compute profit earned by Ramfor the year 2012 – 2013

13) Calculate the value of closing stock from the following

Opening Stock`

60,000Purchases ` 90,000Sales ` 1,20,000Gross profit on cost 33.33%. Due to fire, stock costing ` 15,000 destroyed andinsurance claim was accepted for ` 5,000.

14) Salaries paid in cash ` 2,00,000. It includes previous year’s outstanding ` 10,000 andsalary paid in advance for the next year ` 20,000. Salary outstanding for the year is `

15,000. Salary of ____ shall be debited in the profit & loss account

15) The fixed asset of the company is double of the current assets and half of capital. Ifthe current assets are ` 3,00,000 and investment ` 4,00,000, calculate the currentliabilities assuming that there are no other items in the balance sheet

16) Total Debtors on 31.03.2013 were ` 48,000 before writing off bad-debts but afterallowing discounts. During the year bad-debts amounted to ` 2,000 and discountallowed were ` 100. It is the firm’s policy to maintain a provision of 5% against badand doubtful debts. Find out the amount of provision for Bad and Doubtful debtsas on 31.03.2013

17) Raja’s Balance sheet as at 31st March, 2012 shows ` 6,800 as rent payable. His cash

book shows total payment towards rent ` 50,000 during the year ending 31st March,2013. Rent payable as at 31st March, 2013 is ` 5,000. Which of the following amountshould go to his profit & loss account as rent

18) Units produced 5,000 @ ` 20. Direct expenses ` 5,000. 4/5th of the units were sold @` 25 per unit. What will be the profit

19) Goods purchased ` 90,000, sales ` 80,000, Margin 20% on sales, closing stock will be

20) Goods worth ` 5,000 were supplied to Mr X at an invoice price of 20% above cost

and allowed trade discount at 10% on invoice price. At what price were the goodssold to X?

21) A sole trader has computed a net profit of ` 56,750. After that he found thefollowing mistakes in the books of accounts: Discount received of ` 580 anddiscount allowed of ` 665 have been recorded on the wrong sides of the discountreceived and discount allowed accounts.What would be the actual net profit of trader?

22) An item of furniture was destroyed by fire whose cost was ` 18,000 against which aclaim of ` 12,000 was accepted by the insurance company. The depreciationprovision upto date of fire was ` 2,700. What amount to be recorded in account as




loss by fire?

23) Rent paid on 01st October, 2011 for the period 01st October, 2011 to 30th September2012 was ` 12,000 and rent paid on 01st October, 2012 for the period 01st October,2012 to 30th September, 2013 was ` 18,000. Amount of rent in the profit & lossaccount for the year ended 31st March, 2013 would be

24) X sold goods to Y at a profit of 10% on cost and Y sold the goods to Z at a profit of20% on sale value. If the cost of goods to X is ` 50,000, then at what value Y has soldthe goods to Z?

25) Calculate the Gross profit if rate of gross profit is 20% on sales and cost of goodssold is ` 1,20,000

26) Opening stock ` 8,500; Purchases ` 30,700; Direct expenses ` 4,800; Indirectexpenses ` 5,200; Closing stock ` 9,000. Cost of goods sold will be

27) A company wishes to earn a 20% profit margin on selling price. _____ is the profitmarks up on cost, which will achieve the required profit margin?

28) Opening stock ` 22,000; Closing Stock ` 25,000; Purchases less returns ` 1,10,000.Gross profit margin on sales 20%. Sales of the company will be

29) Capital introduced in beginning by Ram ` 40,000; Further capital introduced duringthe year ` 1,000. Drawings ` 200 per month and closing capital ` 53,600. Theamount of profit or loss for the year is

30) A sells goods at 33.33% above cost. His sales were`

10,20,000 during the year.However, he sold damaged goods for ` 20,000 costing ` 30,000. This sale is includedin ` 10,20,000. The amount of gross profit is

31) A person started business with capital of ` 50,000 and he takes loan from hisrelatives ` 5,000. Profit for the year is ` 10,000 and drawings ` 9,000. What will bethe amount of closing capital?

32) Closing stock of previous year is overvalued by ` 50,000. Due to thisa. Previous year profit is overstated and current year profit is understatedb. Previous year profit is understated and current year profit is overstatedc. Previous year profit is overstated and current year profit is overstatedd. Previous year profit is understated and current year profit is understated

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Final Accounts of Sole Proprietors