Ganga and Godawari are partners sharing profits and losses equally the Trial Balance of their firm on 31st March, 2007 was as following. (20) [September, 2009] (44)

Financial Statement Problem & Solution

Financial Statement Problem

Trial Balance

Particulars Debit Rs. Credit Rs.
Stock (1-4-2006) 80,000
Purchases & Sales 4,00,000 7,68,000
Return Inward 30,000
Carriage 7,500
Power & Fuel 40,000
Wages 35,000
Trade Expenses 8,000
Debtors and Creditors 80,000 60,000
Salaries 72,000
Insurance 6,000
Postage 3,000
Commission 8,000 12,000
Plant & Machinery 2,00,000
Furniture 80,000
Advertisement 15,000
Building 4,00,000
Drawings Ganga 8,000
Drawings Godawari 10,000
Capital Ganga 2,50,000
Capital Godawari 2,50,000
12% Bank loan (taken on 1.10.2006) 1,50,000
Cash in hand 7,500
Total 14,90,000 14,90,000

Adjustments:

  1. Stock on 31.3.2007 was valued at Cost price Rs. 1,00,000 and Market price Rs. 1,20,000.
  2. Depreciate plant and Machinery and Buildings at 20% and 10% respectively.
  3. Insurance is paid for one year ending on 30.06.2007.
  4. Goods withdrawn by Ganga for her personal use of Rs. 10,000 during the year were not recorded in the books.
  5. Provide Rs. 10,000 as Bad debts and Reserve for Doubtful Debts is to be maintained at 5% on Debtors.

Prepare: Trading Account, Profit and Loss Account for the year ending on 31st March, 2007 and Balance Sheet as on that date after making the above adjustments.

Solution

In the books of M/s Ganga & Godawari

Trading Account for the year ended 31.03.2007

Debit Credit
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Opening stock 80,000 By Sales 7,68,000
To Purchases 4,00,000 (-) Return Inward (30,000)
(-) Goods Withdrawn by Ganga (10,000) Net Sales 7,38,000
Net Purchases 3,90,000 By Closing Stock (Cost Price) 1,00,000
To Carriage 7,500
To Power and Fuel 40,000
To Wages 35,000
To Gross Profit c/d 2,85,500
Total 8,38,000 Total 8,38,000

Profit and Loss Account for the year ended 31.03.2007

Debit Credit
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Trade Expenses 8,000 By Gross Profit b/d 2,85,500
To Salaries 72,000 By Commission Received 12,000
To Insurance 6,000
(-) Prepaid Insurance (1,500)
Net Insurance 4,500
To Postage 3,000
To Commission Paid 8,000
To Advertisement 15,000
To Depreciation:
Plant and Machinery (20% on 2,00,000) 40,000
Building (10% on 4,00,000) 40,000
Total Depreciation 80,000
To Bad Debts:
Further Bad Debts 10,000
New R.D.D (5% on 70,000*) 3,500
Total Bad Debts & Provision 13,500
To Interest on Bank Loan (1,50,000 * 12% * 6/12) 9,000
To Net Profit transferred to Capital A/c:
Ganga (1/2) 42,250
Godawari (1/2) 42,250
Total Net Profit 84,500
Total 2,97,500 Total 2,97,500

*Debtors: 80,000 (Trial Balance) - Further Bad Debts 10,000 (Adjustment 5) = 70,000. RDD = 5% of 70,000 = 3,500.

Partners' Capital Accounts (Fluctuating)

Debit Credit
Particulars Ganga (Rs.) Godawari (Rs.) Particulars Ganga (Rs.) Godawari (Rs.)
To Drawings (Cash) 8,000 10,000 By Balance b/d 2,50,000 2,50,000
To Drawings (Goods) 10,000 - By Net Profit 42,250 42,250
To Balance c/d (Balancing Figure) 2,74,250 2,82,250
Total 2,92,250 2,92,250 Total 2,92,250 2,92,250

Balance Sheet as on 31.03.2007

Liabilities Assets
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital Accounts: Building 4,00,000
Ganga 2,74,250 (-) Depreciation (10%) (40,000)
Godawari 2,82,250 3,60,000
Total Capital 5,56,500 Plant & Machinery 2,00,000
Creditors 60,000 (-) Depreciation (20%) (40,000)
12% Bank Loan 1,50,000 1,60,000
(+) Outstanding Interest 9,000 Furniture 80,000
Total Loan 1,59,000 Debtors 80,000
(-) Further Bad Debts (10,000)
70,000
(-) New R.D.D. (5%) (3,500)
Net Debtors 66,500
Closing Stock 1,00,000
Prepaid Insurance 1,500
Cash in hand 7,500
Total Liabilities 7,75,500 Total Assets 7,75,500

Working Notes (Adjustments Explained)

  1. Closing Stock: Valued at its cost price (₹1,00,000) because it is lower than the market price (₹1,20,000), following the accounting principle of conservatism.
  2. Depreciation:
    • Plant & Machinery: 20% of ₹2,00,000 = ₹40,000.
    • Building: 10% of ₹4,00,000 = ₹40,000.
  3. Prepaid Insurance: The insurance premium covers the period up to June 30, 2007. The 3 months after March 31, 2007, are prepaid.
    • Prepaid Amount: ₹6,000 × (3/12) = ₹1,500.
  4. Goods Withdrawn by Partner: Goods worth ₹10,000 taken by Ganga are deducted from Purchases (Trading A/c) and added to her Drawings (Capital A/c).
  5. Bad Debts & Provision:
    • Additional bad debts of ₹10,000 are written off.
    • A new provision of 5% is created on the remaining debtors: 5% × (₹80,000 − ₹10,000) = ₹3,500.
  6. Interest on Loan: Interest on the bank loan is calculated for 6 months (October 1, 2006, to March 31, 2007).
    • Interest Payable: ₹1,50,000 × 12% × (6/12) = ₹9,000. (This is outstanding and added to the loan in Balance Sheet).
  7. Final Capital Balances:
    • Ganga: ₹2,50,000 (Opening) + ₹42,250 (Profit Share) - ₹8,000 (Cash Drawings) - ₹10,000 (Goods Drawings) = ₹2,74,250.
    • Godawari: ₹2,50,000 (Opening) + ₹42,250 (Profit Share) - ₹10,000 (Cash Drawings) = ₹2,82,250.

Financial Statement Example

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