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NCERT Class 11 Accountancy Chapter 9 Financial Statements – II
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Financial Statements – II
Chapter: 9
| PART – II |
| Short Answers |
1. Why is it necessary to record the adjusting entries in the preparation of final accounts?
Ans: The preparation of financial statements, it is necessary that all the adjustments arising out of the accrual basis of accounting are made at the end of the accounting period. Another important consideration in the preparation of final accounts with adjustments, is the distinction between capital and revenue items. Entries which are recorded to give effect to these adjustments are known as adjusting entries.
2. What is meant by closing stock? Show its treatment in final accounts?
Ans: The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period.
The adjustment with regard to the closing stock is done by:
(i) By crediting it to the trading and profit and loss account, and.
(ii) By showing it on the asset side of the balance sheet.
The adjustment entry to be recorded in this regard is:
Closing stock A/c Dr.
To Trading A/c
The closing stock of the year becomes the opening stock of the next year and is reflected in the trial balance of the next year.
Sometimes the opening and closing stock are adjusted through purchases. In that case, the entry recorded is as follows:
Closing stock A/c Dr.
To Purchases A/c
The trading and profit and loss account, as it is also adjusted in purchases by recording the following entry:
Purchases A/c Dr.
To Opening stock A/c
3. State the meaning of:
(a) Outstanding expenses.
Ans: When expenses of an accounting period remain unpaid at the end of an accounting period, they are termed as outstanding expenses. As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged against revenue for computation of the correct amount of profit or loss.
The entry to bring such expenses into account is:
Concerned expense A/c Dr.
To Outstanding expense A/c
The above entry opens a new account called Outstanding Expenses which is shown on the liabilities side of the balance sheet. The amount of outstanding expenses is added to the total of expenses under a particular head for the purpose of preparing trading and profit and loss accounts.
(b) Prepaid expenses.
Ans: There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense is carried forward to the next year and is termed as prepaid expenses.
The necessary adjustment in respect of prepaid expenses is made by recording the following entry:
Prepaid expense A/c Dr.
To concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the assets side of the balance sheet.
(c) Income received in advance.
Ans: Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income.
Income received in advance is adjusted by recording the following entry:
Concerned income A/c Dr.
To Income received in advance A/c
The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown as a liability in the balance sheet.
(d) Accrued income.
Ans: It may also happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income.
The adjusting entry for accrued income is:
Accrued income A/c Dr.
To Concerned income A/c
The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.
4. Give the Performa of income statement and balance in vertical form.
Ans:
Income Statement For the Year Ended
| Date | Particulars | Amount |
| Sales Revenue Less: Cost of Goods Sold Opening Stock Add: Purchases Less: Closing Stock | XXX XXX XXX | |
| Total Cost of Goods Sold XXX | XXX | |
| Gross Profit | XXX | |
| Operating Expenses: – Selling Expenses – Administrative Expenses | XXX XXX | |
| Total Operating Expenses | XXX | |
| Operating Profit (or Loss) Non-Operating Income (if any) Non-Operating Expenses (if any) | XXX XXX XXX | |
| Profit Before Tax Tax Expense | XXX XXX | |
| Net Profit (or Loss) | XXX |
Balance Sheet – Vertical Format
Balance Sheet As at ……….
| Particular | Amount | Particular | Amount |
| Current Assets Cash and Cash Equivalents Accounts Receivable Inventory (Closing Stock) | XXX XXX XXX | Liabilities and EquityCurrent Liabilities: Accounts Payable Short-term Loans | XXX XXX |
| Total Current Assets | XXX | Total Current Liabilities | XXX |
| Fixed Assets: Property, Plant, and Equipment Intangible Assets | XXX XXX | Long-term Liabilities: Long-term Loans Bonds Payable | XXX XXX |
| Total Fixed Assets | XXX | Total Long-term Liabilities | XXX |
| Total Assets | XXX | Total Liabilities | XXX |
| Equity: Share Capital Retained Earnings | XXX XXX | ||
| Total Equity | XXX | ||
| Total Liabilities and Equity | XXX |
5. Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?
Ans: The provision for doubtful-debts is created with the motive of minimising the effect of actual loss caused by the bad-debts. In the discussed balance sheet, debtors now appear at Rs. 13,000, which is their estimated realisable value during next year. It is quite possible that the whole of this amount may not be realised in future. However, it is not possible to accurately know the amount of such bad debts. Hence, it is a reasonable estimate of such loss and provides the same. Such provision is called provision for bad debts and is created by debiting a profit and loss account. Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet.
6. What adjusting entries would you record for the following:
(a) Depreciation.
Ans: Depreciation A/c Dr.
Accumulated Depreciation A/c
(b) Discount on debtors.
Ans: Profit and Loss A/c
Provision for Discount on Debtors A/c
(c) Interest on capital.
Ans: Profit and Loss A/c
Drawings A/c
(d) Manager’s commission.
Ans: Profit and Loss A/c
Manager’s Commission Payable A/c
7. What is meant by provision for discount on debtors?
Ans: A business enterprise allows discount to its debtors to encourage prompt payments. Discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts.
8. Give the journal entries for the following adjustments:
(a) Outstanding salary Rs. 3,500.
Ans: Salary Expense A/c Rs. 3,500
Salary Payable A/c Rs. 3,500
(b) Rent unpaid for one month at Rs. 6,000 per annum.
Ans: Rent Expense A/c Rs. 500
Rent Payable A/c Rs. 500
(c) Insurance prepaid for a quarter at Rs.16,000 per annum.
Ans: Prepaid Insurance A/c Rs. 4,000
Insurance Expense A/c Rs. 4,000
(d) Purchase of furniture costing Rs. 7,000 entered in the purchase book.
Ans: No adjustment entry needed. Since the purchase of furniture is already recorded in the purchase book, it’s reflected in the accounting records.
| Long Answers |
1. What are adjusting entries? Why are they necessary for preparing final accounts?
Ans: The preparation of financial statements, it is necessary that all the adjustments arising out of the accrual basis of accounting are made at the end of the accounting period. Another important consideration in the preparation of final accounts with adjustments, is the distinction between capital and revenue items. Entries which are recorded to give effect to these adjustments are known as adjusting entries.They ensure expenses are recorded in the period they benefit, and revenue is recognized when it’s earned, not necessarily when cash is received or paid.
2. What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?
Ans: The provision for doubtful: Debts is created with the motive of minimising the effect of actual loss caused by the bad-debts. In the discussed balance sheet, debtors now appear at Rs. 13,000, which is their estimated realisable value during next year. It is quite possible that the whole of this amount may not be realised in future. However, it is not possible to accurately know the amount of such bad debts. Hence, it is a reasonable estimate of such loss and provides the same. Such provision is called provision for bad debts and is created by debiting a profit and loss account.
In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet. Final accounts, also known as financial statements, are crucial summaries of a company’s financial activities and position. These documents provide a comprehensive overview of a business’s financial performance during a specific period, usually a fiscal year. Final accounts are important for corporate accounting because they provide a comprehensive and accurate picture of the financial performance and position of the company.
3. Show the treatment of prepaid expenses depreciation, closing stock at the time of preparation of final accounts when:
(a) When given inside the trial balance?
Ans: Prepaid balance: There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense is carried forward to the next year and is termed as prepaid expenses.
Adjustment: Deduct the portion of prepaid expenses that has been used up as an expense, reducing the prepaid asset.
Depreciation: The decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to a profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset will be shown at cost minus the amount of depreciation.
Adjustment: Recognize the expense and reduce the value of the asset.
Closing stock: The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The adjustment with regard to the closing stock is done by
(i) by crediting it to the trading and profit and loss account. and
(ii) by showing it on the asset side of the balance sheet.
Adjustment: No adjustment is needed if closing stock value is already included in the trial balance.
(b) When given outside the trial balance?
Ans: Prepaid expenses: Reflect the current period expenses by identifying the amount of prepaid expenses that need to be adjusted.
Adjustment: Reducing the prepaid assets by recognizing the expenses.
Depreciation: The current period amount of depreciation recognise the expenses and reduce the value of the assets.
Adjustment: Recognize the expense and reduce the value of the asset.
Closing stock: At the end of the accounting period determine the value of closing stock.
Adjustment: Record closing stock in the trading account and the balance sheet.
