CLOSING STOCK

It is also an item of adjustment. Closing stock does not appear in the Trial balance. Following adjusting entry is passed for closing stock.

Closing Stock A/c                                           Dr.

To Trading A/c

It will be clear from the above journal entry that closing stock will be posted at the credit side of Trading account. Closing stock account, if prepared will show debit balance (every asset has a debit balance) and as such it will also be written at the assets side of the balance sheet.

Closing stock may be in Trial balance, if it so, the closing stock will be written only at one place i.e., Assets side of the Balance sheet.

Illustration 2. The following balances were extracted from the books of Shri Brijesh Chandra on 30^th June, 2003 

                                                            $                                                                                  $

Capital                                    24500                          Bad debts                                550

Drawings                                2000                            Loan                                       7,880

General expenses                    2500                            Sales                                        65,360

Buildings                                 11000                          Purchases                                47,000

Machinery                               9340                            Scooter                                    2.000

Stock                                        16200                          Bad debts, provision               900

Power                                      2240                            Commission (Cr. )                   1,320

Taxes and Insurance               1315                            Scooter Expenses                    1,800

Wages                                      7200                            Bills payable                            3,850

Debtors                                   6280                            Cash                                        80

Creditors                                 2,500                           Bank Overdraft                       3,300

Charity                                    105 

Prepare final accounts for the year ended 30th June, 2003 after giving effect to the following adjustments :

(a)   Stock on 30th June, 2003 was valued at $ 23,500.

(b)   Write off a further of $ 160 as bad debts and maintain the provision for bad debts at 5% on debtors.

(c)    Depreciate machinery at 10% and scooter 12%.

(d)   Provide $ 750 for outstanding interest on overdraft. 

Solution. Trading and Profit and Loss Account of Sh. Brijesh Chandra

for the year ended 30th June, 2003

Dr.                                                                                                                                           Cr.

Balance Sheet of Sh. Brijesh Chandra

as on 30th June, 2003

Note. Provision for bad debts has been calculated on $ 6,120, i.e., 6,280 – 160.

Illustration 3. The following is the trial balance of Mr. S. Kapur on 31st March, 2003.

                                                                                                                        Debit               Credit

                                                                                                                        $                      $

Name of Accounts

Cash in hand ……… ……….. ………………………. …… ….. …………………. …….1080

Cash in bank .. ………………………………………………………………………………..5260

Purchases ……. ………………. ………………………………………………….. ………81350

Sales account …… …. .. … ….. ….. ……………………………………………….. .                                197560

Returns inward ………………………………………………………………….. ……….1360

Return outwards …………………………………………………………………. ………                             1000

~Vages …. …………………… ………… ……………………………………………. …..20960

Fuel and power ……………………………………………………………. ……. …….9460

Carriage on sales ………………………….. ……………………………………. ……6400

Carriage on purchases ………………………………………………………… ……..4080

Stock (1-4-2002) ………………………………………………………………… ………11520

Buildings …………………………………………………………………………… ……..60000

Freehold land …………………………………………………………. …………. …….20000

Machinery ………… ………………………………………………………………. …….40000

Salaries …………………………………………………………………………….. ………30000

Patents ……………………………………………………………………………… ……..15000

General expenses ………………………………………………………………… …….6000

insurance ……….. ………………….. ……………………………………………. …….1200

Capital.. ……. … ………………………………………………. ………………….. .                                    142000

Drawings …………. ………………………………………………………………. .10490

Sundry debtors …………………………………………………………………… .29000

Sundry creditors .. ………………………….. …………………………………… .                                     12600

                                                                                                $       353160                           353160

Taking into account the following adjustments, prepare Trading and Profit and loss account and the Balance sheet: 

(a)   Stock in hand on 31st March. 2003 is $ 13,600.

(b)   Machinery is to be depreciated at the rate of 10% and patents at the rate of 20%.

(c)    Salaries for the month of March, 2003 amount to $ 3,000 were unpaid.

(d)   Insurance includes a premium of $ 170 for the next year.

(e)    Wages include a sum of $ 4,000, spent on the erection of cycle-shed for employees and customers.

(f)     A provision for bad and doubtful debts is to be created to the extent of S% on sundry debtors.

Solution.

Trading and Profit and Loss Account of Mr. S. Kapur

for the year ended 31st March, 2003

Dr.                                                                                                                                           Cr.

Balance Sheet of Mr. S. Kapur

as on 31st March, 2003

Note. Wages paid for erection of a cycle shed is capital expenditure. Cycle shed is a part of building. It will increase the value of building, so wages paid for construction of shed should be added to the value of building. As it has been wrongly included in the wages, so it should be subtracted from wages at the debit side of trading account.

Illustration 4. From the following Trial Balance of M/s Shradha & Sons as on 31st December, 2003, prepare Trading and Profit & Loss Account and Balance Sheet

Adjustments:

(a)   Closing stock $ 64,000.

(b)   Wages Outstanding $ 2,400.

(c)    Bad debts $ 600 and make Provision for bad and doubtful debts to be 5%.

(d)   Rent is paid for 1 1 months.

(e)    Loan from the bank was taken on 1st July, 2003.

(j) Provide depreciation on machine@ 10% & on furniture@ 5%.

Solution.

                                                                               Trading and Profit and Loss Account

                                                                                 for the year ended 31st December; 2003

                  Dr.                                                                                                                                                                                                            Cr.

Notes. (z) Rent has been paid amounting to Rs. 22,000 for eleven months. It means that the rent for one month amounting to Rs. 22,000 + II = Rs. 2,000 is still outstanding. This is why, it has been added to Rent at the debit side of PIL A/c and also shown as liability in the Balance sheet.

(ii) The Trial Balance does not contain any amount of interest on Bank Loan, which is undoubtedly due for six months i.e., July l. 2003 to Dec. 31,2003@ 8%. It amounts to 25,000 x – x- = Rs. 1,000 and treated as 100 12 outstanding interest on loan.

(iii) Provision for Bad debts will be calculated on 20,600-600 = Rs. 20,000@ 5%. lt will amount to Rs. I ,000. This is based upon the logic that, why should provision be made on the amount which has been declared as bad.