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 30th 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.