BALANCE SHEET - Accounts and Finance for Managers

Balance sheet is the third financial statement which reveals the financial status of the enterprise through the total amount of resources raised and applied in the form of assets. This is the fundamental statement of the firm which explores the firm financial stature through the resources mobilized and investments applied i.e. Liabilities and Assets respectively. From the early, according to double entry concept or Duality concept, the balance sheet can be divided into two distinct sides, known as liabilities and assets.

The balance sheet can be disclosed in two different orders

  1. in the order of long lastingness - permanence
  2. in the order of liquidity

Proforma Balance Sheet as on dated…………………….
(In the order of Long lastingness)

BALANCE SHEET

The downward arrow shows the order / arrangement of the assets and liabilities on the basis of permanence or long lastingness
The upward arrow shows the order /arrangement of the assets and liabilities on the basis of liquidity.

Methods of determining the accounting income includes:

  1. Cash method of accounting
  2. Mercantile method of accounting

Cash Method of Accounting

Under this method, cash receipts are matched with the cash payments irrespective of the time period in order to determine the income.

Mercantile Method of Accounting

Under this method, time period is given greater importance than the actual receipts and payments. It records the receipts and expenses pertaining to the specified period whether them are actually received /paid or not. The receipts as well as payments of the other periods should be ignored /eliminated in determining the income of the stipulated duration. It is popularly known in other words as "Accrual Accounting System".

Next stage is to classify the types of income of the enterprise:
To determine income of the business, what should be in character ? Either in accounting income or taxable income.

Taxable income can be computed from the transactions of the enterprise but they are subject to frequent modifications on the tax provisions from one year to another year. This cannot be uniquely found out unlike the accounting income. The accounting income should have to be found out only to the tune of accounting principles and concepts.

The process of final accounts diagram is illustrated in the next page for easier understanding not only to adopt the mercantile system of accounting but also to implement the duality principle of accounting throughout the transactions.

Adjustment entries

The adjustment entries are classified into three segments viz on expenses, incomes and others.

On expenses

The adjustment entries on expense can be classified into two categories

  1. Outstanding Expenses: These are incurred expenses but not paid in cash
    E.g. Rent of the office is Rs. 22, 000 for 11 months only The enterprise has failed to remit the payment of last month rent amounted Rs. 2, 000. According to mercantile system of accounting, the rent of the office, whether fully paid or not, it should be totally considered for the entire duration to determine the income of the enterprise.
    Finally, what is to be done ? The amount of actual rental should be added with the rent which has not been paid by the enterprise i-e (Rs. 22, 000+Rs. 2, 000=Rs. 24,000)
    Treatment of the transaction
    Debit the expense account
    Credit the liability i-e of the person to whom the amount to be paid
  2. Prepaid expenses: Normally, some of the expenses paid for availing the services are not fully extracted during the term; which left / unused should be normally carried forward to the next term. It means that the expense which is paid in advance to make use of the service for forthcoming period to whom is known as debtor; the person who keeps the money of the enterprise for the definite duration is nothing but an asset.
    Debit the asset - Advance payment for service
    Next major segment in the adjustment entry is on Incomes
    • Income Outstanding
    • Perceived Income
  3. Income outstanding: It happens during the enterprise then and there ; which means income earned but not received. It happens in the case of certain income of dividend on shares, interest on loans granted not yet received. The income earned but not received is also an income that should be credited in the income account to know the total volume of the income pertaining to the accounting period. The income earned but not received is nothing but an asset not yet received. The income not yet received from whom should be debited as an asset due to the enterprises money income with the other person /institution.
  4. Income received in advance: Any income received in advance cannot be considered as an income which should be calculated and deducted from the total income received; known as advance receipt. It is the income of the other period; should be eliminated from the income received in accordance with the mercantilist accounting system in determining the income. The income which is received in advance pertaining to the period of non rendered service should removed from the total income received, in order to determine the original income of the period should be known exactly. The amount received in advance of non rendered service is the responsibility to return nothing but the liability of the firm.
    Debit the Income account
    Credit the Income received in advance - Liability of the balance sheet
  5. Bad debts: Bad debts is the result of credit sales which only due to the inability of customers / consumers to settle the overdue. The inability may be due to poor repaying capacity or insolvent during the moment of the sales. The bad debt due to the inability cannot be deducted from the sales volume which was already transacted. The debts cannot be recovered has to be treated as a loss of the firm.
    Debit all losses of the firm. The losses due to bad debts should be appropriately effected as well as adjusted in the individuals' account i-e in the consumers' account who received the goods on credit.

Illustration 5

From the following information extracted from the books of Jain & Co, Prepare Trading, Profit & Loss A/c for the year ended and Balance sheet as on that date.

extracted from the books of Jain

Additional Information:

  1. Value of the stock on 31. 12. 96 Rs. 65, 000
  2. Goods worth Rs 800 for his personal use of the proprietor
  3. Rs. 400 of insurance paid is nothing but advance payment
  4. Salary Rs. 1000 for the month of Dec 1996 has not yet paid outstanding
  5. Charge depreciation
    • Building 2% per annum
    • Machinery 10% per annum
    • Furniture 15% per annum
  6. Maintain provision for doubtful debts @ 5% on sundry debtors. Prepare Trading and Profit & Loss Account of Jain & Co for the year ended 1995-96
  7. Trading and ProfitTrading and ProfitBalance sheet as on 31st dec 1996

Illustration 6

From the following information drawn from the books of M/s Sundaran & Co prepare Trading, Profit & Loss account for the year ended 31st Mar, 2004 and Balance sheet as on dated

Balance sheet as on dated

Balance sheet

Additional Information

  1. Stock on 31st Mar, 2004 Rs. 94, 600
  2. Write off Rs. 600 as bad debts
  3. Provision for doubtful debts 5%on debtors
  4. Create a provision on for discount on debtors & Reserve for creditors 2%
  5. Provide a depreciation on furniture and fixture at 5% per @
  6. Plant machinery depreciation 20%
  7. Insurance unexpired Rs. 100
  8. A fire occurred on 25th Mar 2004 in God own and the stock of the value of the 5000 destroyed fully insured the insurance admitted claim fully yet to be paid.

Profit and loss account of M/s sundaran and co for the year ended 2003-2004

Profit and loss account of M/s sundaran and co for the year ended 2003-2004

Profit and loss account of M/s sundaran and co for the year ended 2003-2004

Profit and loss account of M/s sundaran and co for the year ended 31st march 2004

Illustration 7

From the following figures extracted from the books of M/s Amal &Vimal 31st Mar, 02

extracted from the books of M/s Amal

extracted from the books of M/s Amal

Adjustment entries:
a. The partners share profit and losses Amal 2/5 and Vimal 3/5
b. closing stock Rs. 15, 000
c. stock valued at Rs. 10, 000 was destroyed by fire but insurance company admitted
a claim of 8, 500 only and the claim is not yet paid.
d. Wages include Rs. 2, 000 for installation of anew machinery on 1st Dec., 2005
e. Depreciate the machinery at 10% per annum

Profit and loss account of M/s vimal and amal co for the year ended 2001-02

Balance sheet of M/s vimal and amal co as on dated 31st march 2002

SS jain Bros for the year ended 31st dec 2003


Due to the difference in the trial balance, an examination of the goods was conducted which reveals following errors. Rs. 25 paid to the conveyance was debited to motor van maintenance account Rs. 2, 000 drawn from bank towards for establishment charges was omitted to posted in to ledger. Cash column in the cash book on the receipt side stands excess total by Rs. 400

Adjustment entries:

  • Establishment of charges have been paid only up to Nov & provision of Rs 2,000 has to be made for Dec.
  • Electricity charges are O/s Rs. 25
  • (½) commission on total sales is payable to salesmen, towards which Rs. 1000 as paid in advance.
  • Fixed deposit earns interest at 9% per annum
  • Provide depreciation 20% per annum on motor car
  • Closing stock 31st Dec., 2003

To prepare the trial balance, the following necessary corrections should be made on the respective accounting heads given.

  1. Rs. 25 paid to the conveyance was debited to motor van maintenance account- The errors to be rectified which is known as error without affecting the trial balance.
    Rs. 25 should be deducted from the Motor maintenance account for the wrong entry debited already but at the same time right entry has to be made under the conveyance account through the addition of Rs. 25 i.e., Rs. 25 to be debited.
    To put it in to nutshell, Rs 25 should be deducted from the total of Motor maintenance account in order to cancel the wrong debit entry i.e. Rs. 23, 425-Rs. 25=Rs. 23, 400. To effect the correct entry, Rs. 25 should be to the original conveyance account i.e. Rs. 3, 816+Rs. 25= Rs. 3, 841/-
  2. Rs. 2, 000 was drawn from the bank omitted in the establishment charges account; which is meant for the purpose. -
    Rs. 2, 000 should be added to the establishment charges account total in order to identify the total of establishment charges. Total establishment charges = Rs. 22, 000+ Rs. 2000= Rs. 24, 000
  3. Cash column in the cash book on the receipt side excess total Rs. 400 i.e. Rs. 400 excess total should corrected on the given balance of cash in hand in order to determine the real volume of cash in hand.
    Real volume of cash in hand = Rs. 1, 823-Rs. 400 = Rs, 1423
    Now we have to illustrate the corrected trial balance by incorporating the above given changes.

corrected trial balance

corrected trial balance

Profit and loss account for the year ended 31st dec 2003

Balance sheet as on dated 31st Dec 2003

Pandit Broths for the year ended 31st march 2006

Adjustment:

  • Closing stock Rs. 1, 14, 500
  • There was fire in the premises on 25th Nov, 2005, which damaged the portion of the stock the loss was estimated Rs. 17, 500
  • A.Pandit is the in-charge of purchases of stock item & he is to be paid 2.5% on such purchases
  • A steel table purchased 1st Feb Rs. 3, 000 debited to purchase account
  • B.Pandit who looks after all aspect other than purchases is entitled to the commission of 5% on Net profits of after charging commission
  • Depreciation is to be charged at 2. 5% per annum on building & 10% on furniture fittings profits or losses or share equally for the partners.

Trading account for the year ended 2005-06Balance sheet as on dated 31st march 2006


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