aakar account 10 final_080

101 Approved by CDC, Nepal Trial Balance with their debit and credit balances on a specified period but it is not a distinguished account of the businessman’s affairs. A trial balance is very important tool of financial management and it has many objectives. The followings are the basic and most common objectives of trial balance: i. To check the totals of the subsidiary books A trial balance is prepared with a view to see the accuracy of the totals in the subsidiary books. i.e. the sub-division of journal. For examples, the grand total of all the creditors (the supplier of the goods) should be equal to the total of the purchase book; the grand total of all the debtors (credit sales) should be equal to the total of the sales book of a certain period. Similarly, single journal is prepared for all the business transactions. Thus, the debit total and credit total must be equal. A trial balance is intended to check all such numerical totals to find out the numerical accuracy. ii. To check the Arithmetical Accuracy of Posting A trial balance is viewed to check the arithmetical accuracy of the posting in the ledger accounts. If correct posting has been made from journal or sub-division of journal, the debit and credit totals of the trial balance must tally. iii. To Facilitate the Preparation of Final Accounts Trial balance is a statement of all the ledger accounts with their balances on a specified period. The ledgers are made of assets, capital and liabilities and income, gain, expenses and losses separately on individual headings. It serves as a source statement for preparing final accounts. With the help of trial balance, a businessman prepares profit and loss account by extracting the incomes, gains and expenses and losses (of revenue type) in order to determine profit or loss of his business. Similarly he/she prepares balance sheet by extracting the capital, liabilities and assets from the information of the trial balance upto a certain date. iv. To Serve as an Aid to the Management By comparing the trial balance of various periods, specially of the different years, certain important changes in the different figures can be ascertained and its analysis can be made. It serves as an aid to the management in taking certain decisions. v. To Minimize Errors and Frauds The trial balance helps to minimize errors and frauds. If it does not agree, it helps to locate and rectify the errors as well as it gives moral presence to the accountant to maintain the books of accounts with due care and honesty. vi. To Facilitate Audit Trialbalance collects allthe ledgerbalances at aplace andchecks arithmetical accuracy in recording and posting. Ledger balances provide necessary financial information for the preparation of final accounts. If it is correct, it helps for internal audit and also finally for external audit.

102 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 3. Importance/Advantages of Trial Balance i. It helps to check the accuracy of journal & ledger. ii. It helps to correct the arithmetical errors. iii. It helps to find out errors of double posting. iv. It helps for internal audit. v. It helps to prepare final account. vi. It helps the management for taking effective decision at right time. vii. It helps to find the positions of all account in one place. 4. Specimen and Ruling of a Trial Balance Simply, a trial balance is a statement of the ledger balances taken for a specified period. It is prepared on a plain paper, not specific. The debit balances are mentioned in the debit column and the credit balances in the credit column. The specimen ruling of a trial balance is as follows. “Trial Balance of Co. As on ........................” S.N. Particulars L.F. Dr. Balance Cr. Balance (1) (2) (3) (4) (5) Total i. Since a trial balance is prepared at any given date, its heading should always be mentioned as: “Trial Balance of ................. Co. As on .........................” ii. The serial numbers of the ledger heading are respectively mentioned in the first column. iii. The ledger accounts in respect of the serial number are mentioned in the 2nd column irrespective of the debit or credit balances on them. iv. Page numbers of the respective ledger accounts are mentioned in the 3rd column, if any. v. The amount of the debit or credit balance is respectively mentioned in the 4th and/ or 5th, columns. But sometimes the debit and credit totals may be mentioned in the respective 4th and 5th columns when trial balance is prepared on total method. vi. Finally, the totals of debit side and credit side are determined to see whether the two totals are equal. 5. Considerations of a Trial Balance Even though a trial balance is a simple list or statement of ledger balances on a certain specified date, one should consider the following important points. i. Since a trial balance is completely based on the ledger accounts, all the ledgers should be duly prepared.

103 Approved by CDC, Nepal Trial Balance ii. The heading of a trial balance should be mentioned on the top middle of the page “Trial balance ...................... Co. As on ............................” iii. A trial balance can be prepared on the basis of total figures or balance figures of the ledger accounts. Thus, the debit and credit totals of the ledgers should be determined along with the balancing of the accounts. iv. The ledger accounts should be mentioned along with their serial number so as to facilitate the counting. It helps to find out whether or not any ledger account is omitted. v. The respective ledger page number of the accounts should be mentioned if any in the L.F. column to facilitate the reference of the required ledger. vi. All assets, expenses and losses have debit balances and So, they are to be debited in trial balance. Capital, liabilities, incomes and gains have credit balances and, thus, are to be credited in it. Dr. side: Assets, Drawing, Expenses and losses Cr. side: Capital, Liabilities, income, gain, reserve and surplus vii. After mentioning all the ledger accounts in the trial balance, its debit and credit sides should be separately totaled to see whether or not they are equal. viii. When the two totals of a trial balance are equal, it is supposed that the books of account are arithmetically accurate; otherwise the books of accounts should be thoroughly revised as far as possible to locate the arithmetic errors. ix. When the errors cannot be detected, and there it becomes a problem to proceed onward for the preparation of final accounts. In such a case, an account called a ‘suspense account’ is opened for the adjustment of the trial balance. The suspense account is opened for that side where there’s a shortage of amount and totals are made equal and proceeded onward to prepare final accounts. After finding the errors, errors are to be detected and corrected by passing journal and suspense account is removed from the trial balance. It means that, when the debit side of the trial balance is less than the credit side, suspense account is mentioned in the debit side with the amount shorting to meet the credit total and vice versa. Later on, when the errors are found by internally checking or auditing the account, the suspense account is replaced by the detected ledger account or heading. But one should be familiar with the fact that, trial balance is not the conclusive measure to check all types of errors in the books of accounts of a businessman’s transactions. 6. Methods of Preparing Trial Balance Simply, a trial balance is a statement of ledger balances on a specified period and prepared in vertical way in the form of a table. There are three methods of preparing a trial balance which are explained with the following examples. Methods of Trial Balance Total Method Balance Method Combined/Mixed Method

104 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Illustration - 1 Prepare journal vouchers from the following transactions, post them into the ledger and prepare the trial balance to check their accuracy of ABC Co., Chitwan. 078, Baishakh: 1, Commenced business with Cash Rs. 20,000. 2, Deposited into bank Rs. 15,000. 3, Bought goods for cash Rs. 1,000. 4, Furniture purchased from ABC Furnitures Rs. 1,500. 6, Purchased goods from Kailash & Co. Rs. 2,000. 8, Goods sold for cash Rs. 1700. Solution: Journal Entries of ABC Co., Chitwan Date Particulars L.F. Dr. Amount Cr. Amount 078-1-1 Cash A/c .............. Dr. To Capital A/c (Being business commenced) 20,000 20,000 078-1-2 Bank A/c .................. Dr. To Cash A/c (Being deposited into bank) 15,000 15,000 078-1-3 Purchase A/c .................. Dr. To Cash A/c (Being goods purchased) 1,000 1,000 078-1-4 Furniture A/c .................. Dr. To ABC Furniture’s A/c (Being furniture purchased on credit) 1,500 1,500 078-1-6 Purchase A/c .................. Dr. To Kailash & Co’s A/c (Being purchased on credit) 2,000 2,000 078-1-8 Cash A/c .................. Dr. To Sales A/c (Being goods sold in cash) 17,00 1,700 Total Rs. 41,200 41,200 Preparation of Ledgers: Dr. Cash A/c Cr. Date Particulars J.F Amount Date Particulars J.F. Amount 078-1-1 078-1-8 To Capital A/c To Sales A/c 20,000 1,700 078-1-2 078-1-3 078-1-31 By Bank A/c By Purchase A/c By Balance c/d 15,000 1,000 5,700 21,700 21,700 2-1 To Balance b/d 5,700

105 Approved by CDC, Nepal Trial Balance Dr. Capital A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-31 To Balance c/d 20,000 078-1-1 By Cash A/c 20,000 20,000 20,000 078-2-1 To Balance b/d 20,000 Dr. Bank A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-2 To Cash A/c 15,000 078-1-31 By Balance c/d 15,000 15,000 15,000 078-2-1 To Balance b/d 15,000 Dr. Purchase A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-3 078-1-6 To Cash A/c To Kailash & Co. A/c 1,000 2,000 078-1-31 By Balance c/d 3,000 3,000 3,000 078-2-1 To Balance b/d 3,000 Dr. Furniture A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-4 To ABC Furniture 15,000 078-1-31 By Balance c/d 15,000 15,000 15,000 078-2-1 To Balance b/d 15,000 Dr. ABC Furniture’s A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-31 To Balance c/d 15,000 078-1-31 By Furniture A/c 15,000 15,000 15,000 By Balance c/d 15,000 Dr. Kailash & Co.’s A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-31 To Balance c/d 2,000 078-1-6 By Purchase A/c 2,000 2,000 2,000 2078-2-1 By Balance c/d 2,000 Dr. Sales A/c Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 078-1-31 To Balance c/d 1,700 078-1-8 By Cash A/c 1,700 1,700 1,700 2078-2-1 By Balance c/d 1,700

106 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal i. Total Method In this method, both the debit and credit totals (before balancing the accounts) of the ledger accounts are put in the respective debit and credit column. When both the totals in the trial balance are equal at the last, it proves the arithmetical accuracy of the books of account. The following is common specimen of a trial balance, prepared under total method. Trial Balance As on 31st Baishakh, 078 S N. Particulars L.F. Dr. Amount Cr. Amount 1. 2. 3. 4. 5. 6 7. 8. Cash A/c Capital A/c Bank A/c Purchase A/c Furniture A/c ABC Furniture A/c Kailash & Co. A/c Sales A/c 21,700 - 15,000 3.000 1,500 16,000 20,000 1,500 2,000 1,700 Total 41,200 41,200 ii. Balance Method It is the most common and generally adopted method. Under this method, the debit and credit balances of the ledgers are mentioned in the respective columns in the trial balance to see whether the both totals of its balance are equal or not. The balance of a ledger is the difference of its debit total and credit total of a certain specified period. The specimen of a trial balance under balance method is given below: Trial Balance As on 31st Baishakh, 078 S N. Particulars L.F. Dr. Amount Cr. Amount 1. 2. 3. 4. 5. 6 7. 8. Cash A/c Capital A/c Bank A/c Purchase A/c Furniture A/c ABC Furniture A/c Kailash & Co’s A/c Sales A/c 5,700 15,000 3,000 1,500 20,000 1,500 2,000 1,700 Total 25,200 25,200 iii. Combined/Mixed Method This method is the combination of the first and second methods i.e. the total and the balance methods. Hence, this method presents both the total and balance figures in the same trial balance in separate columns. There are two main amount columns for total and

107 Approved by CDC, Nepal Trial Balance balance figures and each column has further two columns for debit and credit figures. In the same trial balance, the debit and credit balances can be compared with the differences of debit and credit totals of the respective account. The debit and credit totals of the total column should be equal and similarly the debit and credit totals of the balance column should also be equal to each other. But the totals of the total columns are always more than the totals of the balance columns. The following is the specimen of the mixed method. Trial Balance As on 31st Baishakh, 078 S.N. Particulars L.F. Total Balance Dr. Amount Cr. Amount Dr. Amount Cr. Amount 1 2 3 4 5 6 7 8 Cash A/c Capital A/c Bank A/c Purchase A/c Furniture A/c ABC Furniture A/c Kailash & Co. A/c Sales A/c 21,700 - 15,000 3,000 1,500 - - - 16,000 20,000 - - - 1,500 2,000 1,700 5,700 - 15,000 3,000 1,500 - - - - 20,000 - - - 1,500 2,000 1,700 Total: 41,200 41,200 25,200 25,200 7. List of possible items shown in trial balance. S.N. Particulars L.F. Debit amount Credit amount Reasons 1. Opening stock ×××× Assets 2. Purchase ×××× Expenses 3. Sales return ×××× Decrease in sales 4. Travelling expenses ×××× Expenses 5. Cash ×××× Assets 6. Bank ×××× Assets 7. Commission expenses ×××× Expenses 8. Loan given ×××× Assets 9. Bad debt ×××× Loss/ Expenses 10. Wages ×××× Expenses 11. Rent ×××× Expenses 12. Salary ×××× Expenses 13. Allowance ×××× Expenses 14. Land & building ×××× Assets 15. Machinery and plant ×××× Assets 16. Furniture ×××× Assets 17. Motor ×××× Assets

108 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 18. Establishment Expenses ×××× Assets 19. Adm. & office expenses ×××× Expenses 20. Patent ×××× Assets 21. Bills receivable ×××× Assets 22. Investment ×××× Assets 23. Depreciation ×××× Expenses 24. Custom, tax &fees ×××× Expenses 25. Debtor ×××× Assets 26. Interest expenses ×××× Expenses 27. Insurance & Advertisement ×××× Expenses 28. Phone & post expenses/electricity ×××× Expenses 29. Printing, transportation & fuel ×××× Expenses 30. Capital ×××× Capital 31. Purchase return ×××× Decrease in purchase 32. Accrued expenses ×××× Liabilities 33. Sales ×××× Revenue 34. Unearned commission ×××× Liabilities 35. Interest received ×××× Income 36. Bank overdraft ×××× Liabilities 37. Bankers ×××× Liabilities 38. Commission received ×××× Income 39. Appreciation on building ×××× Income 40. Rent received ×××× Income 41. Customers’ deposits ×××× Income/ Liabilities 42. Discount received ×××× Income 43. Unpaid expenses ×××× Liabilities 44. Creditor ×××× Liabilities 45. Provision for taxation ×××× Liabilities 46. Loan and bills payable ×××× Liabilities 47. Sinking fund ×××× Capital 48. Reserves ×××× Capital 49. Advance income/commission ×××× Liabilities 50. Carriage inward ×××× Expenses 51. Import/excise duty ×××× Expenses 52. Royalties ×××× Expenses 53. Cartage ×××× Expenses 54. Motive power ×××× Expenses 55. Audit fees ×××× Expenses

109 Approved by CDC, Nepal Trial Balance 56. Legal charges ×××× Expenses 57. Sampling expenses ×××× Expenses 58. Discount ×××× Expenses 59. Commission ×××× Expenses 60. Export duty ×××× Expenses 61. Repair & maintenance ×××× Expenses 62. Charity donation ×××× Expenses 63. Bank charge ×××× Expenses 64. Sales tax ×××× Expenses 66. Brokerage ×××× Expenses 66. Loss on sale of assets ×××× Loss 67. Loss by incident ×××× Loss 68. Drawings ×××× Decrease in capital 69. Prepaid expenses ×××× Assets 70. Goodwill ×××× Assets 71. Accrued income ×××× Assets 72. Copy Right ×××× Assets 73. Bad debt recovered ×××× Income 74. Provision for bad debts ×××× Expenses 75. Apprenticeship premium ×××× Income 76. Income from investment ×××× Income 77. Gain of sale of assets ×××× Gain 78. Dividend received ×××× Income 79. Deposit from customers ×××× Income 80. Miscellaneous receipts ×××× Income 81. Interest on investment ×××× Income 82. Outstanding expenses ×××× Liabilities 83. Sale of scrap ×××× Income Total ×××× ×××× Note: 1. Rent, interest, commission, discount, etc. are considered as expenses and are to be recorded on debit sides but rent received, interest received, commission received, discount received, etc. are income and are to be recorded on credit side of trial balance. 2. Interest on loan, interest on bank overdraft are the expenses and recorded on debit side but interest on investment, interest on given loans, interest on bank deposit/balance are incomes and recorded on credit side of trial balance. 3. If closing stock is given, it should be recorded an debt side of trial balance as it is an asset business on closing date.

110 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 8. Accounting Errors and Trial Balance There may be some intentional or unintentional i.e. knowing or unknowing mistakes committed by the accountant or other accounting staff in the process of maintaining books of account. The mistakes, which may take place in the process of maintaining books of account, are known as book-keeping errors or accounting errors. When the two sides of a trial balance agree (become equal), it indicates the arithmetical accuracy of the books of account of a business concerned. But, the agreement of trial balance doesn’t necessarily mean the accounting records are free from every error because there might be still some errors, which cannot be revealed/disclosed by a trial balance. Therefore, a trial balance should not be regarded as a conclusive proof of the accuracy of the books of account. In this way, there are two types of errors which are given below. A. Errors Disclosed by a Trial Balance When the two sides of a trial balance fail to agree i.e. are not equal, the books of account are not regarded as arithmetically accurate. The debit and credit totals of a trial balance do not agree because of some errors and the disagreement of the two totals of a trial balance locates the arithmetical errors. Thus, the following errors can be disclosed by a trial balance by means of the disagreement of the two totals. i. Wrong totalling of Subsidiary Books ii. Errors of posting on the wrong side of a ledger iii. Over/under casting an amount while posting into ledger iv. Errors of double posting on one side of a ledger v. Errors of omission of posting on one side of a ledger vi. Errors of totalling and balancing of accounts in the ledger vii. Omission of any ledger A/c in the trial balance viii. Errors of mentioning the balance of any ledger in the wrong side of trial balance ix. Errors in the totalling of the trial balance itself B. Errors Not Disclosed by a Trial Balance The objective of preparing a trial balance is to check the arithmetical accuracy of the books of account. When both sides of a trial balance are equal, we assume that there are no mistakes in the books of account. The agreement of a trial balance proves the accuracy of the books of account. However, it should not be taken as the conclusive proof of the entire accuracy because there are still some certain errors, which remain unaffected by the agreement in trial balance. These errors are known as errors, not revealed by the trial balance. They are given below: i. Errors of Omission If a transaction is not recorded in the book of original entry, both the debit and credit aspects of the transaction will be omitted. This error will not affect the trial balance. For example, if goods sold to Dahal Bros, of Rs. 1,000 is not recorded in the books at all i.e. neither debited in Dahal Bros. A/c nor credited in sales A/c, it will not affect the totals of the trial balance. It is because there’s omission of Rs. 1,000 on both sides. Thus, this type of error cannot be disclosed by a trial balance. Key Point The error which occurs due to not recording of transaction in primary books i.e. journal or subsidiary book is called error of complete omission.

111 Approved by CDC, Nepal Trial Balance ii. Errors of Commission It is the committed error. This type of errortakes place when an imaginary transaction is entered in the original book of account or when a posting is made on the right side but in wrong account. It will not make any difference in the totalling of trial balance. For example, when an unreal transaction of any value is entered in the original book, it will increase both sides of the trial balance with the same amount and will not create the disagreement. The mentioning of wrong amount of a transaction in the original book is also an error of commission e.g. payment of salary Rs. 2,300 may be entered in the original book in extent of Rs. 3,200 in both sides. Similarly, the under-casting of any expense or over/under casting of any income, etc. cannot be revealed by the trial balance. Key Point The error which occurs due to wrong recording of the transaction either by wrong amount or in wrong account is called error of commission. iii. Compensating Errors When the effect of one error is neutralised by the effect of another error, such errors are called compensating errors. For example, forgetting to post Rs. 500 on the debit side of certain account may be compensated/neutralised by under-casting Rs. 500 on the credit same of another account. Since the first error is neutralised by second error, it will not affect the trial balance in numerical total and thus, such errors cannot be revealed by a trial balance. Key Point The errors on which one effect is cancelled or neutralised by another effect is called compensating error. iv. Errors of Principle When the fundamental principle of accountancy is not followed while recording a business transaction, it is to be an error of principle. Such an error occurs when an expense is treated as asset or an asset as expenses or an income as liability or a liability as an income, etc. Similarly, it occurs, when an account to be debited is credited and vice versa. For example, when salary A/c is credited and cash A/c is debited for the payment of salary, it is said to be an error of principle. This will not affect the totals of trial balance because the entry opposes the principle of book keeping. But the amount is allocated to both sides in the same extent. Thus, the trial balance cannot disclose such type of errors. Key Point The error which occurs due to violation of accounting principles for recording the transaction is called error of principle. v. Errors of Posting in the Wrong Account If posting of any transactions is made in the wrong account but on the correct side, the errors will not affect the total balance of trial balance. For example, machinery purchased from Suman for Rs. 15,000 is credited to Raman account in the ledger. In this case, trial balance will agree but it is error. Key Point The error which occurs due to record in the wrong account by on the correct side is called errors of posting in the wrong account.

112 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Points to Remember i. Errors of omission ii. Errors of commission iii. Compensating errors vi. Errors of principle vi. Errors of posting in the wrong account 9. Illustrative Problems and Solutions Illustration 2 From the following balances taken from the books of Sanokaji & Co. as on 31th Ashwin, 078, prepare a trial balance. Heads of account Amount (Rs) Heads of account Amount (Rs) Cash Sundry debtors Salaries & wages Capital Sales Freight Discount earned Furniture 10,000 21,600 2,700 50,000 48,500 4,000 450 2,500 Commission paid Purchases Carriage inward Sundry creditors Drawings Return outwards Bank Machinery 150 20,000 3,000 5,000 6,000 2,000 9,000 27,000 Solution: Trial Balance of Sanokaji & Co, As on 31st Ashwin, 078 S.No Particulars L.F. Dr. Balance Cr. Balance 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Cash (Assets) Sundry debtors (Assets) Salaries & wages (Expenses) Capital (Capital) Sales (Income) Freight (Expenses) Discount earned (Income) Furniture (Assets) Commission paid (Expenses) Purchases (Expenses) Carriage inward (Expenses) Sundry creditors (Liabilities) Drawings (Less from capital) Return outwards (Less from purchase) Bank (Assets) Machinery (Assets) 10,000 21,600 2,700 - - 4,000 - 2,500 150 20,000 3,000 - 6,000 - 9,000 27,000 - - - 50,000 48,500 - 450 - - - - 5,000 - 2,000 - - Total: 1,05 950 1,05,950

113 Approved by CDC, Nepal Trial Balance Illustration - 3 The following balances were extracted from the books of Bharatmani Bros. as on 31st Kartik, 078, prepare a trial balance: Heads of account Balance (Rs) Heads of account Balance (Rs) Capital Business premises Furniture & fixtures Plant and machinery Purchases Sales Return inwards Return outwards Carriage inward Carriage outward 60,000 35,000 13,500 46,000 78,000 1,30,000 1,500 2,000 1,400 1,100 Discount allowed Wages Insurance & rates Sundry creditors Sundry debtors Drawings Bills payable Cash in hand Bank overdraft Commission received 600 17,000 1,200 22,000 34,000 3,000 4,000 1,500 15,300 500 Solution: Trial Balance of Bharatmani Bros, as on 31st Ashwin, 078 S.N. Particulars L.F. Dr. Balance Cr. Balance 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Capital (Capital) Business premises (Assets) Furniture & fixtures (Assets) Plant and machinery (Assets) Purchases (Expenses) Sales (Income) Return inwards (Less from sales/income) Return outwards (Less from purchase/expenses) Carriage inward (Expenses) Carriage outward (Expenses) Commission received (Income) Discount allowed (Expenses) Wages (Expenses) Insurance & rates (Expenses) Sundry creditors (Liabilities) Sundry debtors (Assets) Drawings (Less from capital) Bills payable (Liabilities) Cash in hand (Assets) Bank overdraft (Liabilities) - 35,000 13,500 46,000 78,000 - 1,500 - 1,400 1,100 - 600 17,000 1,200 34,000 3,000 - 1,500 - 60,000 - - - - 1,30,000 - 2,000 - - 500 - - - 22,000 - - 4,000 - 15,300 Total 2,33,800 2,33,800

114 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Illustration - 4 From the following balances, prepare a trial balance as on 30th Bhadra, 078, in the books of LNS Co. Pvt. Ltd. Heads of account Balance (Rs) Heads of account Balance (Rs) Bills receivables Rent Opening stock Building Loan Purchases Interest Bills payable Sales return Tax and insurance 13,000 7,000 5,500 25,000 20,000 35,000 3,000 10,500 5,000 1,500 Capital Debtors Creditors Bank overdraft Sales Wages Cash Machinery Purchase returns Dividend (Cr.) 60,000 22,000 20,000 12,000 58,000 13,000 5,000 50,000 3,500 1,000 Solution: Trial Balance of LNS Co. Pvt. Ltd, as on 31st Bhadra, 078 S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Bills receivables Capital Rent Debtors Opening stock Creditors Building Bank overdraft Loan Sales Purchases Wages Interest Cash Bills payable Machinery Sales returns Purchase returns Tax and insurance Dividend (Cr.) 13,000 - 7,000 22,000 5,500 - 25,000 - - - 35,000 13,000 3,000 5,000 - 50,000 5,000 - 1,500 - - 60,000 - - - 20,000 - 12,000 20,000 58,000 - - - - 10,500 - - 3,500 - 1,000 Total 1,85,000 1,85,000

115 Approved by CDC, Nepal Trial Balance Illustration - 5 From the under mentioned ledger balances of Hiralala & Co., prepare a trial balance as on 31st Ashwin, 078. Heads of account Balance (Rs) Heads of account Balance (Rs) Capital Business premises Furniture and fittings Discount allowed General expenses Carriage outwards Bank deposit Reserve fund Sales returns Rent received from tenants Carriage inwards Cash in hand 30,000 20,000 8,500 1,600 4,000 500 5,000 4,500 2,000 2,000 2,200 1,600 Stock (1-6-075) Sundry debtors Sales Insurance premium Salaries Bad debt written off Sundry creditors Purchases income tax paid Wages Legal expenses 10,000 12,000 1,50,000 1,500 10,000 800 11,500 1,10,000 1,500 5,000 1,800 Solution: Trial Balance of Hiralal & Co. As on 31st Ashwin, 078 S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.) 1. 2. 3. 4. 5. 6 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Capital Stock (1-6-075) Business premises Sundry debtors Furniture and fittings Sales Discount allowed Insurance premium General expenses Salaries Carriage outwards Bad debt written off Bank deposit Sundry creditors Reserve fund Purchases Sales returns Income tax paid Rent received from tenants Wages Carriage inwards Legal expenses Cash in hand - 10,000 20,000 12,000 8,500 - 1,600 1,500 4,000 10,000 500 800 5,000 - - 1,10,000 2,000 1,500 - 5,000 2,200 1,800 1,600 30,000 - - - - 1,50,000 - - - - - - - 11,500 4,500 - - - 2,000 - - - - Total 1,98,000 1,98,000

116 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Illustration - 6 Prepare a trial balance from the following ledger balances of ABC Co. Kathmandu, for Ashad, 2078. Heads of account Balance (Rs) Heads of account Balance (Rs) Equity Capital Business premises Purchase Heating and lighting Salaries Return inwards Bad debt recovered Book debts Borrowed loan Account payable 80,000 60,000 55,000 7,000 20,000 2,500 6,500 25,000 70,000 13,500 Motor car Stock at commencement Sales Wages Trade creditors Creditors Equipment Selling expenses Travelling expenses Account receivables 50,000 10,000 1,10,000 15,000 13,000 1,500 30,000 4,500 3,500 12,000 Solution: Trial Balance of ABC Co., Kathmandu, as on Ashad, 2078 S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Equity Capital Motor car Business premises Stock at commencement Purchase Sales Heating and lighting Wages Salaries Trade creditors Return inwards Creditors Bad debt recovered Equipment Book debts Selling expenses Borrowed loan Travelling expenses Account payables Account receivables - 50,000 60,000 10,000 55,000 - 7,000 15,000 20,000 - 2,500 - - 30,000 25,000 4,500 - 3,500 - 12,000 80,000 - - - - 1,10,000 - - - 13,000 - 1,500 6,500 - - - 70,000 - 13,500 - Total 9,550 9,550

117 Approved by CDC, Nepal Trial Balance Illustration - 7 The following is a trial balance prepared by an inexperienced book-keeper. Redraft it in a correct form. Trial Balance, As on ......................... S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Opening stock Capital Cash in hand Cash at bank Interest paid Bills payable Wages Purchase returns Sales returns Sales Purchases Rent paid Commission paid Bills receivables Furniture Debtors and Creditors Loan on debenture Vehicles 400 - 500 - 300 600 700 300 - 2,150 - 100 - - 500 3,000 - 1,300 - 3,500 - 1,000 - - - - 200 - 800 - 50 700 - 2,000 1,000 - Total 9,850 9,850 Solution: Trial Balance, As on ........................ S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Opening stock Capital Cash in hand Cash at bank Interest paid Bills payable Wages Purchase returns Sales returns Sales Purchases Rent paid Commission paid Bills receivables Furnitures Debtors and Creditors Loan on debenture Vehicles 400 - 500 1,000 300 - 700 - 200 - 800 100 50 700 500 3,000 - 1,300 - 3,500 - - - 600 - 300 - 2,150 - - - - - 2,000 1,000 - Total 9,850 9,850

118 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Glossary Disagreement : Not to agree Errors : mistakes committed unknowingly Fraud : to cheat, mistakes committed knowingly Subsidiary book : additional book where the record of credit purchase, credit sales, return and cash transaction are recorded. Omitted : to neglect, to leave out Omission : lapse Accuracy : exactness/equal Rectified : corrected Revealed : found Suspense account : doubtful account Exercise A. Answer the following questions in one sentence. 1. What is trial balance? 2. What is suspense account? 3. What are the methods of preparing trial balance? 4. What do you mean by errors of principle? 5. Write the major debit items of trial balance. B. Give short answers to the following question. 6. Define a trial balance and mention its importance. 7. Mention the specimen rulings of a trial balance. 8. Write the objectives of trial balance. 9. Mention the important considerations of a trial balance. 10. What is accounting error? What are its types from trial balance point of view? Mention. 11. Mention the errors that can be revealed by a trial balance. 12. Describe about the errors that cannot be revealed by a trial balance, with suitable examples. NUMERICAL PROBLEMS 13. Pass journal entries, prepare necessary ledger accounts and draw out a trial balance from the following information of ABC Co., Chitwan. Jestha 1 Commenced business with cash of Rs. 20,000 and goods worth Rs. 10,000.

119 Approved by CDC, Nepal Trial Balance Jestha 5 Withdrawn Rs. 2,000 on a permanent basis out of capital. Jestha 6 Brought in additional capital of Rs. 5,000. Jestha 9 Sale of goods Rs. 9,500. Jestha 10 Drawings made during the year Rs. 2,500. Jestha 12 Furniture purchased from Pooja Rs.10,000. Jestha 15 Goods purchased from Manish Rs. 5,000. Jestha 22 Goods purchased Rs. 3,000. Jestha 30 Paid salaries Rs. 3,000. 14. From the following ledger balances, prepare a Trial Balance as on 30th Chaitra, 2078. Ledger Balances Amount Ledger Balances Amount Capital Drawing Purchase returns Sales Sales returns Wages Carriage inward Carriage outward Printing and stationery Plants & machinery Land and building Debtors Bills receivables 20,000 1,000 500 21,000 1,000 3,000 500 800 600 4,000 5,000 1,900 1,600 Stock (1-12-2078) Purchase Insurance Salaries Commission Interest Trading expenses Rent & taxes Cash in hand Cash at bank Creditors Bills payables 6.000 11,000 200 1,500 1,200 500 300 400 1,000 2,000 1,300 700 Ans: Total Rs. 43,500 15. Prepare a Trial Balance from the following information. Ledger Balances Amount Ledger Balances Amount Suresh’s capital Leasehold premises Due form customers Purchase returns Creditors Cash in hand Salaries & Wages Rent rates and taxes 1,556 741 530 264 528 142 598 465 Suresh’s drawing Sales Purchases Loan from bank Trading and office expenses Bills payables Opening stock Sales returns 564 2,756 1,268 250 784 100 264 98 Ans: Total: 5454

120 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 16. From the following ledger balances extracted from the books of Baburam, prepare a Trial Balance as on 31st Baisakh, 079. Ledger Balances Amount Ledger Balances Amount Baburam’s capital Baburam’s drawing Loan on mortgage Business premises Dock charges Purchase Stock at commencement Shipping and railway freight Bad debt recovered Miscellaneous receipts Customers Account receivables Account payables Plant & Machinery Equipments 1,00,000 7,500 60,000 62,000 2,000 80,000 10,000 6,000 3,000 5,800 30,000 7,000 8,000 34,000 16,000 Vehicle Clearing charges Carriage & cartage Trade expenses Carriage insurance Wages Suppliers Patent Trade marks Bank overdraft Cash in hand Sales Commission (Cr) Interest on loan 30,000 2,500 3,500 5,000 1,500 17,000 26,000 18,000 22,000 30,000 13,000 1,35,000 2,200 3,000 Ans: Total: 3,70,000 17. The following balances were extracted from the books of Niraj Bros. as on 31st Bhadra, 078. Prepare Trial Balance. Ledger Balances Amount Ledger Balances Amount Capital Cash in hand Cash at bank Stock (1-5-075) Purchases Bad debt (loss) Carriage in Return to suppliers Wages Rent and rates Legal charges 10,000 1,700 7,000 1,000 11,000 500 800 1,000 4,000 600 400 Packing and printing S/creditors Trade expenses Drawing Bills payables S/debtors Repairs and maintenance Reserve fund Sales Return form customers Carriage out 300 4,500 1,600 1,500 3,500 8,000 700 2,500 17,000 1,400 400 Ans: Trial Balance Total: 40,900, Suspense A/c (Cr): 2,400,

121 Approved by CDC, Nepal Trial Balance 18. From the following ledger balances, prepare a Trial Balance. Heads Amount Heads Amount Secured loan Lease hold premises Loose tools Notes receivable Notes payable Interest on loan borrowed Commission received in advance Unpaid rent Equity capital Manufacturing expenses Office and general expenses Salesman’s commission 9,000 12,000 4,000 5,000 4,500 500 600 900 16,000 1,700 5,500 700 Provision for bad debts Sundry expenses Miscellaneous income Plant and machinery Furnitures and fittings Wages Salaries Income tax Purchases Returns out Sales Returns in 1,500 700 1,400 9,500 7,500 4,300 2,200 800 22,000 1,000 43,000 1,500 Ans : Trial Balance Total: 77,900 19. Prepare a trial balance of Nepal Store for the fiscal year 2078/079 based on the following particulars. Description Amount Description Amount Capital Purchase Sales Goodwill 2,13,000 75,000 1,25,000 45,000 Salary Discount received Stationery Machine 25,000 2,000 5,000 1,90,000 Ans: Total: 3,40,000 20. Prepare Trial Balance from the following ledger balances. Heads Amount Heads Amount Land and building Plant and machinery Capital Loan on debenture Book debts Trade creditors Opening stock Purchases Discount on purchase Interest received Investment to XYZ Co. Dividend received Telephone charges 50,000 30,000 63,000 40,000 24,000 20,000 7,000 35,000 2,000 1,100 10,000 2,300 1,800 Postal charges Vehicles Bad debt recovered Cash Bank overdraft General reserve Goodwill Sales Sales returns Office and general expenses Audit fees Loan to Sharma Bros. Carriage outward 700 25,000 1,600 13,000 10,000 21,000 17,000 65,000 3,500 2,300 800 5,000 900 Ans: Trial Balance Total: 2,26,000

122 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 21. Prepare the Trial Balance of Rabi Furniture Industry for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Purchase Sales Loan to Mohan Bank Overdraft 40,000 70,000 60,000 40,000 Suppliers Bills payable Land & Building Wages and Salary 35,000 15,000 45,000 15,000 Ans: Total Rs. 1,60,000 22. Prepare the Trial Balance of Himal Iron Industry for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Capital Loose tools Trade Mark Sales 50,000 65,000 35,000 60,000 Advance Wages Bills receivable Loan of Hari Creditors 25,000 30,000 20,000 25,000 Ans: Trial Balance Total: 1,55,000 23. Prepare the Trial Balance of Krishna Masala Industry for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Gas and Water Reserve Closing Stock Capital 20,000 25,000 5,000 40,000 Commission Bills Payable Preliminary Expenses Insurance 25,000 50,000 45,000 20,000 Ans: Trial Balance Total: 1,15,000 24. Prepare the Trial Balance of Ram & Sita Co. for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Purchase Discount on Sale Commission Received Bills Receivable 75,000 10,000 25,000 25,000 Ram’s capital Commission to Salesman Profit on Sale of Fixed Assets Income from Investment 90,000 25,000 10,000 10,000 Ans: Trial Balance Total: 1,35,000 25. Prepare the Trial Balance of Nepal Feed Industry for the fiscal year 2078/079 from the following particulars. Particulars Amount Particulars Amount Advertisement Short Term Loan Goodwill Advance Expenses 30,000 35,000 33,000 15,000 Dividend Received Outstanding Salary Insurance Received Interest on Development Bond 30,000 15,000 22,000 20,000 Ans: Trial Balance Total: 1,00,000

123 Approved by CDC, Nepal Trial Balance 26. Prepare the Trial Balance of R & S Co. for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Bad debts Loan from Basu Bills payable Opening stock 15,000 40,000 25,000 85,000 Rent Sales Interest from fixed deposit Distribution Expenses 20,000 60,000 20,000 25,000 Ans: Trial Balance Total: 1,45,000 27. Prepare the Trial Balance of Sagar Furniture for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Accrued income Bank loan Cash Sales 10,000 40,000 45,000 70,000 Bills payable Debtors Discount received Purchase 20,000 25,000 30,000 80,000 Ans: Trial Balance Total: 1,60,000 28. Prepare the trial balance of Bikash Furniture, Kathmandu for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Sale of scrap Investment Rent earned Drawing 40,000 20,000 10,000 15,000 Machine Loan of Prem Advance Income Depreciation 35,000 30,000 10,000 20,000 Ans: Trial Balance Total: 90,000 29. Prepare the Trial Balance of Anusha and Anjana Company for the fiscal year 2078/079 from the following particulars. Particulars Amount (Rs.) Particulars Amount (Rs.) Capital Purchase Debtor Bills payable 160,000 116,000 40,000 6,000 Opening stock Furniture Sales Interest received 80,000 16,000 80,000 26,000 Ans: Trial Balance Total: 2,72,000, Suspense account Dr. Rs. 20,000 S.L.C/SEE Examination Questions 1. Prepare a Trial Balance of Kashyapi Medical Hall, Chitwan as 2072 Ashad 31 on the basis of followings transactions. 2072 (R) Particulars Amount (Rs.) Particulars Amount (Rs.) Opening stock Purchase Purchase Return Bank Loan 27,000 2,46,000 15,000 23,000 Depreciation Sales Insurance Wages 35,000 3,32,000 40,000 22,000 (Ans: Rs. 3,70,000)

124 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 2. Prepare a trial balance of Limbu & Company, Ilam on 2073 Asadh 31 on the basis of followings particulars. 2073 (R) Particulars Amount (Rs.) Particulars Amount (Rs.) Capital Sales Depreciation Furniture 5,00,000 11,25,000 50,000 1,75,000 Purchase Advertisement Land Bank Loan 7,00,000 1,00,000 8,00,000 2,00,000 (Ans: Rs. 18,25,000) 3. Prepare a Trial Balance of Koshi Centre, Biratnagar on 31 Asadh 2078 on the basis of followings transactions. 2074 (R) Particulars Amount (Rs.) Particulars Amount (Rs.) Capital Purchase Sales Rent paid 1,50,000 6,00,000 7,00,000 2,00,000 Depreciation Bank Loan Business Premises Machinery 50,000 13,00,000 9,00,000 4,00,000 (Ans: Total Rs. 21,50,000) 4. Prepare Trial Balance of Kunal Guest House as on 31st, Asadh, 2062, from the following particulars. (2063) Particulars Amount (Rs.) Particulars Amount (Rs.) Capital Purchase Sales Drawings Machinery & Equipment 3,22,000 9,70,000 12,00,000 83,000 3,71,000 Bank Loan Creditors Depreciation Reserve Fund Bills Receivable 56,000 1,50,000 1,65,000 91,000 2,30,000 (Ans: Total Rs. 18,19,000) 5. Prepare a Trial Balance of Shagun Company of 31st Asadh, 2064 from the, following transaction. (S.L.C. 2064 `R’) Particulars Amount (Rs.) Particulars Amount (Rs.) Purchase Furniture Purchase Return Bills Receivable Debtor 2,50,000 30,000 15,000 8,000 5,000 Sales Bank Loan Depreciation Discount Received Sales Return 2,12,000 80,000 12,000 5,000 7,000 (Ans: Total Rs. 3,12,000) 6. Prepare a Trial Balance of Rai Khadya Stores for the fiscal year 2078/079 on last Asar, 2078 based on following particulars. 2068 (R) Particulars Amount (Rs.) Sales Purchases Sales Return Creditors Outstanding Expenses Advance Income Furniture Machinery 2,00,000/- 40,000/- 60,000/- 15,000/- 25,000/- 40,000/- 80,000/- 1,00,000/- Ans: Trial balance total = Rs. 280000

125 Approved by CDC, Nepal Trial Balance 7. Prepare a trial balance of Shyam and Company for the fiscal year 2064/065 based on the following particulars. 2067 (S) Description Amount Description Amount Capital Salary Purchase Interest received Rs. 2,40,000/- Rs. 40,000/- Rs. 2,45,000/- Rs. 15,000/- Sales Maintenance expenses Furniture Bad debts Rs. 1,50,000/- Rs. 60,000/- Rs. 50,000/- Rs. 10,000/- Ans: 4,05,000 8. From the following particulars, prepare trial balance of Remesh & Sons Store Pokhara for the fiscal year end of Ashadh 2078/067. 2067(R) Description Amount Description Amount Opening stock Capital Wages Commission received Rs. 40,000/- Rs. 2,10,000/- Rs. 70,000/- Rs. 6,000/- Purchase Sales Bank balance Creditors Rs. 1,45,000/- Rs. 1,89,000/- Rs. 1,80,000/- Rs. 30,000/- Ans: Trial balance total Rs. 43,500 9. Prepare a trial balance of Patan Garment Industry for the fiscal year 2064/2065 upto the end of Asar from the following particulars : 2066(S) Description Amount Description Amount Capital Opening stock Purchase Sales Rs. 5,50,000/- Rs. 4,30,000/- Rs. 6,90,000/- Rs. 7,10,000/- Purchase return Salary Advertisement Reserve fund Rs. 50,000/- Rs. 2,00,000/- Rs. 30,000/- Rs. 40,000/- Ans: Rs. 13,50,000 10. Prepare a Trial Balance of Saman Wood Industry as on 31st Ashad, 2065 from the following particulars. 2066 (R) Description Amount Description Amount Capital Sales Bank Loan Depreciation Rs. 2,50,000 Rs. 3,30,000 Rs. 20,000 Rs. 10,000 Purchase Drawing Creditors Machine Rs. 4,00,000 Rs. 25,000 Rs. 25,000 Rs. 1,90,000 Ans: Trial Balance Total = Rs. 6,25,000 11. Prepare a Trial Balance of Kathmandu Cold Store for the fiscal year end of Asar, 2064/2065 from the following particulars. 2065(S) Description Amount Description Amount Capital Sales Sales Return Stationery Rs. 1,70,000/- Rs. 4,95,000/- Rs. 14,000/- Rs. 63,000/- Purchase Opening stock Salaries Bank overdraft Rs. 2,35,000/- Rs. 80,000/- Rs. 3,50,000/- Rs. 77,000/- Ans: Total of Trial Balance Rs. 742000

126 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 12. Prepare a trial balance of S.&S. Trade concern for the fiscal year 2063/64 based on the following particulars : 2065(R) Description Amount Description Amount Capital Sales Purchases Discount Rs. 1,25,000 Rs. 3,60,000 Rs. 2,00,000 Rs. 2,000 Salary Advertisement Advance Income Machine Rs. 70,000 Rs. 30,000 Rs. 15,000 Rs. 1,98,000 Ans: Trial balance total = Rs. 5,00,000 13. Prepare a trial balance of Gauri Shankar Store, Charikot for the fiscal year end of Asar, 2068/69 from the following particulars. SLC 2069 Particulars Amount Particulars Amount Opening Stock Purchase Commission received Depreciation 5,70,000 3,30,000 11,000 20,000 Sales Purchase return Creditors Wages 6,80,000 1,80,000 1,59,000 1,10,000 Ans: Rs. 10,30,000 14. Prepare a trial balance of Amrit Sweet Home as an 31st Ashadh from the following particulars. SLC 2070 Particulars Amount Particulars Amount Capital Discount Rent Furnitures 2,50,000 5,000 70,000 3,23,000 Purchase Sales Stationery Loan 3,00,000 4,60,000 30,000 18,000 Ans: Rs 7,28,000 15. Prepare a trial balance of ABC Traders for the fiscal year end of Asar, 2070/071 from the following particulars. SLC 2071 Particulars Amount Particulars Amount Capital Machine Bank Overdraft Purchase 6,00,000 5,80,000 40,000 8,00,000 Bill Payable Sales Sales return Office Expenses 60,000 7,50,000 20,000 50,000 Ans: Rs. 14,50,000 Project Work a. Make a trial balance after observing and analyzing the journal and ledger of any social or business organization.

127 Approved by CDC, Nepal Final Accounts Trial Balance Unit 6 Final Accounts CDC Syllabus 6.1 Profit and loss account- Introduction and advantages Methods of calculating gross profit- gross loss and net profit and net loss 6.2 Balance sheet- Introduction, advantage and use adjustments: Closing stock Advance payment Outstanding Depreciation- in amount 15 Periods After studying this unit, students will be able to : define final account and its types, state the objectives and importance of trading, profit and loss account and balance sheet, prepare trading, profit and loss a/c and balance sheet, differentiate between trial balance and balance sheet, define some adjustment items and show their impact of final account, solve some of the practical problems. Learning Objectives Balance Sheet of Ramesh & Bros. As on 30-12-075 Trading, Profit and Loss Account of Ramesh & Bros. As on 30-12-075

128 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 1. Introduction Every business is motivated by profit. Thus, a businessman wants to determine the profit or loss of his business after a certain period and its financial position on that date. He/ she needs the complete monetary figures of the incomes, gains and expenses and losses of his business concern of a certain period, say a year, in order to determine the profit or loss for the period. Similarly, she/he needs the actual monetary values of the capital, liabilities and assets of her/his concern on that date to find out its true financial position. These all pieces of information are obtained from the ledger balances of certain specified period, usually of a year, because ledger accounts are prepared on separate heads of incomes, gains, expenses, losses, capital, liabilities and assets. After preparing the ledgers and getting their balances (Dr. or Cr. balances), they are to be tested by preparing a trial balance to check their arithmetical accuracy. Then, when the ledger accounts are found accurate, the final accounts are prepared from the information of trial balance. The final accounts, comprised of trading and profit and loss and balance sheet, are basically intended to ascertain the profit or loss at the end of a fiscal year and the true financial position on that date. Thus, final accounts may be defined as the books of account of a business concern, prepared at the end of a fiscal year to ascertain the result of its operation i.e. profit/loss for the period and its true financial position on that date. According to S. Mukharjee, “Final account is the account which is prepared at the end of a given year period to see the profit and loss position as well as the financial position of a going concern for the period given.” In conclusion, it is the final process of accounting for preparing financial statements, i.e. trading A/c, profit and loss A/c and balance sheet to show the operating result and financial position of the firm. Key Point Final accounts are the accounts prepared at the end of a given period of time to ascertain profit or loss and financial position of the business. 2. Objectives/Importance of Final Accounts i. To know the profit/loss of the business. ii. To know the position of capital, liabilities and assets. in. To find out the liquidity and solvency position of business. iv. To control over the unnecessary financial transactions which are essential for the business. v. To predict the future performance of the business. vi. To communicate the financial transactions in summary.

129 Approved by CDC, Nepal Final Accounts Trading Account 3. Introduction The account, which is prepared by a business concern, at the end of an accounting year, in order to ascertain the gross profit or gross loss resulting from the sales and the cost of goods sold, is known as trading A/c. It includes all the direct and factory expenses on the debit side and sales, closing stock and abnormal loss of stock, if any, on the credit side to compare the sales revenue and the cost of goods sold. Thus, the difference between the totals of its debit side and credit side is either gross profit or gross loss. When the total of credit side i.e. the total of incomes is heavier than the total of debit side i.e. the total of expenses, gross profit occurs. Otherwise, when the debit total exceeds the credit total, it results the gross loss. In this way, it tries to ascertain the gross profit or gross loss of business concern during a certain period, say a year, in its normal production or trading operation. This account is mainly prepared to find out the profitability of the goods bought or manufactured and sold by a business concern. It is the first step of final accounts. Key Point Trading account is the first step of final accounts prepared to ascertain profit or loss from its production and trading operation i.e. gross profit or gross loss of the business. 4. Objectives of Trading Account There’s a notable importance of trading A/c to the business organizations. Its importance may be highlighted in terms of the following objectives: i. To find out the gross profit or gross loss during a year in order to measure the profitability of the goods bought or manufactured and sold by a business concern. ii. To find out the gross profit ratio or the gross loss ratio by comparing the gross profit and sales figures and measure the efficiency by comparing with that of the last years and taking necessary corrective measures, if required. iii. To determine the net purchase and sales during the year. iv. To find out the opening and closing stock for the year. v. To acquire the knowledge about the direct expenses and factory and manufacturing overheads and the abnormal losses of stock in trade, if any, and control over them in an appropriate way. vi. To provide suggestions to the business authority to determine the price of the products by providing information about the cost of goods sold. A certain percentage of projected profit is added in the cost of the products to determine the selling price. 5. Importance and Advantages of Trading Account A trading A/c is important for a business undertaking. The importance of a trading A/c can be described in respect to the following advantages:

130 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal i. Finding Out Gross Profit or Loss A trading A/c ascertains the gross profit/loss resulting from the sales and cost of goods sold of a business concern during each accounting period. This helps to measure the profitability of the goods bought or manufactured and sold. If gross loss has accrued, then it will suggest the entrepreneur to close down the business line temporarily till the improvement of the conditions. ii. Helpful in Fixation of Selling Price Generally, a businessman determines the selling price of his products by adding a certain percentage of profit on their cost. Since a trading A/c enters all the direct costs and factory/manufacturing indirect expenses of the products, a certain percentage of profit can be calculated on such a cost and selling price can be easily determined. iii. Maintaining Efficiency Trading A/c helps to compare the projected profit and the actual profit and helps to analyse the reason for the differences, if any. Then the necessary improvements can be done if the actual profit is less than the projected one. Similarly, when the actual profit is more than the projected one, efforts can be made to maintain it in the future. In this way efficiency can be maintained. iv. Comparison of Figures It provides the important figures like net purchases, net sales, gross profit, opening stock and closing stock, etc. Thus, a businessman can see a ratio of gross profit to sales, compare the purchase and sales and make an appropriate valuation of stocks, which can be compared with that of the previous years. v. Control Over the Expenses and Losses It provides the information about all direct expenses and factory/manufacturing indirect expenses under separate headings. Thus, necessary control can be made over them by eliminating wastage and leakage and minimizing overheads. It also helps to ascertain the percentage of direct expenses over sales. Points to Remember i. Finding out gross profit or loss ii. Helpful in fixation of selling price iii. Maintaining efficiency vi. Comparison of figures v. Control over the expenses and losses Debit Side Items of Trading A/c i. Opening Stock The term ‘stock’ refers to the stock of goods. Generally goods may be found in three forms - raw materials, semi raw materials i.e. work in progress and finished goods. Thus, there may be stock of raw materials, semi-raw materials or finished goods. The opening stock is the stock of unused materials or unsold goods remained at the end of the previous accounting year and brought forward to the beginning of the current accounting year.

131 Approved by CDC, Nepal Final Accounts Since this stock is brought forward to the beginning of the current year with its value (stock is generally valued on the basis of cost price or present market price whichever is less), it is assumed as an expense to the current year and thus, charged on the debit side of trading A/c. ii. Purchase and Purchase Return Purchases refer to all the cash as well as credit purchases of goods (but not of capital assets) during a year. It is a revenue nature expense on materials or goods purchased for the regular dealing of a business concern. Sometimes materials/goods of some value may be returned to the supplier, specially out of the credit purchases, such a return is termed as purchase return, return outward or return to suppliers. In such a case, net purchase of the year should be found by deducting the total purchase return from the total purchases of the year. The purchase is always charged on the debit side of the trading A/c by deducting the returns, if any. iii. Purchasing Expenses The expenses made on the carriage of goods from the supplier’s place up to the godown of the buyer are known as purchasing expenses or in other words the expenses made during the transitforthe goods bought are known as purchasing or buying expenses. There are a number of such expenses. So, examples of such expenses are as given below: Clearing charges Loading and unloading expenses Shipping and railway freight Import duty Carriage on purchase Octroi charges/local taxes Carriage and cartage, etc. iv. Factory Expenses All the expenses (both of direct and indirect nature) incurred inside the factory for production or manufacturing of the goods is called factory expense. These expenses are debited in trading A/c. The following are some of the examples of factory expenses: Wages, Productive expenses, Manufacturing expenses, Factory expenses like factory rent, factory insurance, factory heating and lighting, etc., Motive power like; coal, water and electricity, fuel, gas, oil, etc. Consumable store like; engine oil, cotton, wastage or rags, soap paper, royalty, etc. Note: Royalty refers to the payment in the form of rent, payable to the owner of an asset such as patentee, author or landlord for acquiring the right to use his patent, copyright or land. If royalty is paid on the basis of production, it is regarded as production expense and thus, debited to trading A/c, if it is paid on the basis of sales, it is regarded as selling expense and thus debited to profit and loss A/c and if it is paid in lump sum, it is regarded as a capital expenditure and thus, mentioned in the assets side of balance sheet.

132 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Credit Side Items of Trading A/c i. Sales and Sales Returns Sales refer to the cash as well as the credit sales of goods (not of the capital assets) during a year. It is a revenue nature income of a business concern for the year. It includes the sales of goods, which have been purchased for resale or manufacturing purpose. It also includes the goods already sold but remained undeliverable. Sometimes, goods of some value may be returned by the customers, specially from out of the credit sales and it is termed as sales returns, return inward or returns from customers. Such a return is deducted from the total sales in order to find out the net sales for the year. Sales are always credited in trading A/c by deducting sales returns, if any. ii. Closing Stock There may be a stock of raw materials, work-in-progress or finished goods in a firm or company at the end of an accounting year in course of its business dealing, which is known as closing stock. Thus, closing stock refers to the stock of unused material or unsold goods remained at the end of the current accounting year. It is the unused material or unsold good and thus, deductible from purchase. So, it is credited in trading A/c (it must be carried forward to the beginning of the coming accounting year and thus, it is credited in trading A/c by creating it as A/c rather than deducting from purchase), on one hand and it is a property to the concern until it is used or sold thus, regarded as an asset and is mentioned in the balance sheet on the other. Normally, it is given outside the trial balance because its valuation is made after the accounts have been closed and the trial balance is prepared. Thus, as a new finding or transaction, it is recorded twice in the final accounts once on the credit side of trading, A/c and then in the assets side of balance sheet according to the principle of double entry book-keeping. iii. Abnormal Loss of Goods Sometimes, there may be an abnormal loss of goods due to fire, theft or other natural disasters. The full value of such a loss (whether recovered from insurance co. or not) should be credited to trading A/c to ascertain the gross result of the normal business operation of a concern. It should be noted, however, that if the total value of such an abnormal loss of the goods is assured to compensate by the insurance company, it should be mentioned further once in the assets side of the balance sheet as ‘insurance claim receivables; if not assured to compensate, then the total of this loss should be charged on the debit side of profit and loss A/c as ‘To goods lost, and by again if it is assured to compensate a certain portion of the loss, that portion mentioned in the balance sheet assets side and the portion of loss, which is not assured to be compensated should be charged on the debit side of profit and loss A/c as a business loss.

133 Approved by CDC, Nepal Final Accounts Specimen and Preparation of Trading A/c Trading A/c of .................. Co. Dr. For the year ended................... Cr. Particulars Amount Particulars Amount To Opening stock To Stock at commencement To Stock (1-1-075) To Purchases .......... Less: Returns .......... To Purchasing expenses To Carriages To Carriages on purchase To Carriage in To Freight inwards To Dock charges To Clearing charges To Loading and unloading To Shipping and railway freight To Import duty/excise duty To Octroi charges To Local charges To Carriage insurance To Coolie & cartage To Factory expenses To Factory rent To Factory insurance To Factory heating & Lightning To Wages To Productive wages To Manufacturing wages To Wages to foremen To Wages and salaries To Motive power To Coal, coke, wood, steam, etc. To Fuel, gas, oil, water, etc. To Stores consumed To Consumable stores To Royalty on production To Gross profit c/d (Balancing figure) .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ......... By Sales .......... Less: Returns .......... By Return from Customers By Return from debtors By Return in By Return (Dr.) By Closing stock By Goods lost by fire, theft, etc. By Gross loss c/d By Stock at end By Unsold stock By Gross loss c/d (Balancing figure) .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... Total: .......... Total: ..........

134 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Procedures of Preparing Trading Account There are the procedures which are followed while preparing trading account. 1. A proper format should be drawn and name of company and the date should be maintained at the top. 2. It is prepared in the form of ledger account and thus, it contains two sides; debit and credit. 3. It is treated as nominal account and all the losses and expenses are debited and all gains and incomes are credited. 4. The word ‘To’ is used in debit side and ‘By’ in credit side. 5. Opening stock and direct expenses are entered in debit side sales and closing stock are entered in credit side. 6. The gross profit or gross loss should be determined by comparing the debit total and credit total. 7. The balancing figure appearing in debit side is termed as gross profit under the word “To gross profit c/d” and the balancing figure appearing in credit side is termed as gross loss under the word “By gross loss c/d”. 8. After the determination of gross profit and gross loss, it should be closed by drawing two parallel lines. Illustration - 1 From the following information, prepare a Trading A/c of Suman Enterprises for the year ended 30th Chaitra, 2078. Particulars Amount Particulars Amount Purchases Wages Sales Purchase returns Octroi charges Clearing charges Power & fuel 35,000 5,000 65,000 2,500 1,500 1,300 1,800 Carriage inward Opening stock Factory expenses Carriage insurance Coal & coke Sales returns Import duty 2,000 12,000 10,000 500 700 3,000 1,200 Closing stock was valued at Rs. 20,000

135 Approved by CDC, Nepal Final Accounts Solution: Trading A/c of Suman Enterprises Dr. For the year ended 30th Chaitra, 2078 Cr. Particulars Amount Particulars Amount To Opening stock To Purchases 35,000 Less: Returns 2 500 To Carriage inward To Wages To Factory expenses To Carriage insurance To Octroi charges To Coal & coke To Clearing charges To Power & fuel To Import duty To Gross profit c/d 12,000 32,500 2,000 5,000 10,000 500 1,500 700 1,300 1,800 1,200 13,500 By Sales 65,000 Less: Returns 3,000 By closing stock 62,000 20,000 Total: 82,000 Total: 82,000 Illustration -2 From the following balances, prepare a Trading A/c for the year ended 32nd Ashadh, 2079. Particulars Amount Particulars Amount Purchases Sales Sales returns Factory rent Factory heating and lighting Wages 25,000 50,000 3,500 4,000 700 7,000 Stock (1-4-075) Purchase returns Carriage inward Coal, gas & water Stores consumed 5,000 2,500 1,000 300 3,000 Closing stock: 20,000

136 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Solution: Trading A/c of ........ Dr. For the year ended 32nd Ashadh, 2079 Cr. Particulars Amount Particulars Amount To Opening stock To Purchases 25,000 Less: Returns 2,500 To Carriage inward To Factory rent To Factory heating and lighting To Coal, gas and water To Wages To Store consumed To Gross profit c/d 5,000 22,500 1,000 4,000 700 300 7,000 3,000 23,000 By Sales 50,000 Less: Returns 3,500 By closing stock 46,500 20,000 Total: 66,500 Total: 66,500 Exercise A. Answer the following questions in one sentence. 1. What is final account? 2. What is trading account? 3. How is the gross profit determined? 4 How is gross loss determined? 5. What is closing stock? 6. What is direct income? 7. What is direct expense? 8. Write a difference between direct expenses and indirect expenses. 9. Why is trading account prepared? 10. What is opening stock? 11. What will be the result if total of debit side is heavier than total of credit side in trading account? B. Give short answers to the following questions. 12. What is meant by final accounts? Explain any four objectives of final account. 13. What is trading account? Explain its any four objectives. 14. Describe any five point of importance of a trading A/c. 15. Draw-up a common specimen of a trading A/c with their respective debit and credit items.

137 Approved by CDC, Nepal Final Accounts NUMERICAL PROBLEMS 16. Prepare the Trading Account of R & R Distributors on the basis of the following particulars as on 31 st Ashad, 2079. Particulars Amount Particulars Amount Opening Stock Wages Sales Custom Duty 2,30,000 14,000 4,45,000 15,000 Octori Return inward Purchase Other Manufacturing Expenses 3,000 15,000 1,10,000 35,000 Ans: Gross profit Rs. 23,000 17. Prepare the Trading Account of Sani & Dasha Company for the fiscal year 2078/079 from the following particulars. Particulars Amount Particulars Amount Opening Stock Sales Freight on Purchase Purchase 8,00,000 12,50,000 55,000 6,50,000 Return outward Sales return Closing Stock Duty on Import 43,000 54,000 60,000 35,000 Ans: Gross loss Rs. 2,41,000 18. Prepare the Trading Account of Meri Gold Pvt. Ltd., Chitwan on the basis of the following particulars as on 31st Ashadh, 2079. Particulars Amount Particulars Amount Opening Stock Wages and salary Sales Factory Expenses 125,000 50,000 320,000 14,000 Closing Stock Return inward Purchase Royalties 20,000 14,000 60,000 25,000 Ans: Gross profit Rs. 52,000 19. Prepare the Trading Account of Hari Pvt. Ltd., Kathmandu on the basis of the following particulars as on 31st Ashadh, 2079. Particulars Amount Particulars Amount Opening stock Sales Royalties Manufacturing wages Coolie and cartage Excise duty Coal and coke Productive expenses Return inward 40,000 80,000 5,000 5,000 1,000 4,000 1,500 5,000 6,000 Purchase Carriage on purchase Closing stock Factory insurance Custom duty Store consumed Return outward Lighting & heating 36,000 15,000 15,000 10,000 1,200 1,000 1,200 1,500 Ans: Gross loss Rs. 36,000

138 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal S.L.C/SEE Examination Questions 1. Why is trading account prepared? Mention its four objectives. 2+ 4=6 (2060S, 2062R) 2. Prepare trading account of Shiv Company, Itahari on last of Ashadh, 2078 from the following items. (2057S) Particulars Amount Particulars Amount Opening stock Sales Purchase Sales return 50,000 2,50,000 1,50,000 10,000 Wages Closing stock Fuel expenses 10,000 60,000 5,000 (Ans: G.P. Rs 85,000) 3. Prepare trading account of Samjhana Company for the year ended Ashadh, 2057 according to the following particulars. (2058S) Particulars Amount Particulars Amount Opening stock Sales return Closing stock Purchases 50,000 10,000 10,000 1,50,000 Purchase return Fuel Expenses Sales Wages 7,000 5,000 5,00,000 10,000 (Ans: GP Rs 2,92,000) 4. Prepare a trading account of Laxmi Brick Industry Pvt. Ltd. Bhaktapur for the year ended Ashad, 2060 from the following particulars. (2060R) Particulars Amount Particulars Amount Opening stock Coal Sales return Wages Purchase return 356,000 2,48,000 50,000 2,00,000 90,000 Purchase Sales Factory rent Stock (32nd Ashadh) Production expenses 14,80,000 25,25,000 3,00,000 6,75,000 3,56,000 (Ans: GP Rs 3,00,000) 5. Prepare the trading account of Steel Wood Company for the year ended 31st Ashadh, 2062 from the following particulars. (Send-up Board) Particulars Amount Particulars Amount Opening stock Purchase Carriage inward Packing expenses Purchase return Factory insurance 20,000 75,000 3,000 5,000 4,000 2,000 Closing stock Sales Wages Manufacturing expenses Sales return Factory expenses 35,000 1,75,000 8,000 8,000 2,000 5,000 (Ans: GP Rs 86,000)

139 Approved by CDC, Nepal Final Accounts 6. Prepare a trading account of Avash Company at the end of Ashadh, 2061 according to the following transactions. (Board) Particulars Amount Particulars Amount Opening Stock Factory rent Carriage Wages Closing stock 12,000 5,000 2,000 22,500 20,000 Purchase return Sales return Sales Purchase Clearing charges 2,500 2,200 82,500 35,000 2,000 (Ans: GP Rs 24,300) 7. Prepare a Trading Account of Baba Biscuit Industry Pvt. Ltd. for the fiscal year 2061/062 of Ashadh, from the following transactions. (2062R) Particulars Amount Particulars Amount Stock on 1st Shrawan Purchase Sales Fuel Carriage Inward 2,25,000 7,80,000 9,50,000 1,32,000 90,000 Sales Return Wages Octroi Closing stock 16,000 1,40,000 23,000 3,00,000 (Ans: G.L. Rs. 1,56,000) Profit and Loss A/c 6. Introduction Profit and Loss A/c is the second step of final accounts. It is prepared after preparing the trading A/c by transferring gross profit from the trading A/c on its credit side or gross loss on its debit side. After the result of the trading A/c is entered, it enters all the office and administrative and selling and distribution expenses and losses on the debit side and indirect incomes, gains and profits on the credit side in order to determine the net profit/loss for the year. Thus, a profit and loss A/c may be defined as the second step of final accounts which is prepared to ascertain the net profit/loss of a business concern for each accounting year, resulting from indirect incomes plus gains and expenses plus losses of the year. It enters all such expenses and losses on the debit side and the incomes and gains on the credit side. Thus, the difference between the total of its debit side and credit side is either net profit or net loss. It means when the totals of its credit side i.e. the total of incomes, gains and profits is heavier than the total of its debit side i.e. the total of expenses and losses, it results net profit. Otherwise, when the debit total exceeds the credit total, it results net loss. According to S. Mukherjee, “Profit and loss account is a statement which summarises all indirect revenue expenses in one side which is compared with gross profit revenue incomes in another side and trading income of an accounting period is assessed.” The net profit ascertained by profit and loss A/c is the taxable income of that concern for the year. It is prepared, on one hand to facilitate the tax determination and on the other, for finding out the general efficiency of a business concern in its normal business operation.

140 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Trading A/c and Profit and Loss A/c are also, termed as an income statement if it is prepared in the form of a statement i.e. the add and less schedule. Key Point Profit and loss account is the second step of final account prepared to ascertain net profit or net loss of the business. 7. Objectives of Profit and Loss Account There are various objectives of preparing profit and loss A/c. The main objectives are mentioned below: i. To find out the net profit/loss during a yearin orderto measure the general efficiency of a business conduct. ii. To facilitate the assessment of tax liability by ascertaining the net profit i.e. the taxable income. by comparing the total of all permissible incomes, gains and profits on one side i.e. credit side and expenses and losses on the other i.e. debit side. iii. To identify each head of indirect expenses and losses and make the necessary control over them by eliminating wastage, leakage, mishandling, etc. iv. To compare the different relevant figures like net profit and gross profit or losses, net profit and sales, net profit to the total of non-production expenses, gross profit to such non-production expenses, etc. Similarly, the current year’s gross profit, net profit and expenses can also be compared with those of the previous years. v. To facilitate the preparation of balance sheet by transferring the profit or loss to the capital A/c. The net profit increases the capital and is thus, added to it and the net loss decreases the capital and thus, deducted from it. 8. Importance and Advantages A Profit and Loss A/c is very important financial document of a business concern. It ascertains the net profit/loss of a concern for each accounting period by means of all the revenue incomes plus gains and revenue expenses plus losses. Thus, it measures the general efficiency of the concern. The importance of a profit and loss A/c can be studied in terms of the following advantages: i. Finding Out Net Profit/Loss Profit and Loss A/c of a concern ascertains the net profit or loss at the end of each accounting year by comparing the totals of incomes, gains and profits on one side and the expenses and losses on the other. It helps to measure the success or failure of a business organization in terms of its profit or loss. ii. Facilitating Tax Assessment Profit and Loss A/c is prepared in order to ascertain the taxable income. The audited income statement or profit and loss A/c is recognized by the tax authority. The tax amount is determined on the basis of the net profit shown by profit and loss A/c. Otherwise, it becomes difficult to assess the tax, thus, the authority may charge the tax for more than the actual one. In addition to this, the profit and loss A/c or income statement is legally a must, for joint stock companies.

141 Approved by CDC, Nepal Final Accounts iii. Control Over Expenses and Losses Profit and Loss A/c enters all the administrative and office expenses, and selling and distribution expenses under separate heads and thus the expenses can be studied in order of heads and thus, a proper control over the expenses and elimination of wastage, leakage, etc. can be done in time. Furthermore, the net profit and gross profit can be studied separately, with the indirect expenses to have a general evaluation of expenses. iv. Comparison of Figures A profit and Loss A/c begins with gross profit on credit side or gross loss on debit side. It ascertains the net profit/loss finally, as the balancing figure. Thus, with the help of a profit and loss A/c, the gross profit/loss and the net profit/loss can be compared for the same year. Similarly, it helps to compare the net profit with the sales of the year. Furthermore, the net profit of the current year can be compared with that of the previous years and deviations in such profits may be analysed and improvements can be made if necessary. v. Helpful in the Preparation of Balance Sheet A balance sheet is prepared at the last step of final accounts. The net profit or loss, as the case may be, resulted from profit and loss A/c, is transferred to the capital A/c in the balance sheet. The net profit is added to the capital and net loss is deducted. There will be either a net profit or sometimes a net loss in a business concern. The profit and loss A/c helps to prepare balance sheet by transferring the profit or loss to the capital account. Points to Remember i. Finding out net profit/loss ii. Facilitating tax assessment iii. Control over expenses and losses vi. Comparison of figures v. Helpful in the preparation of balance sheet Debit Side Items of Profit and Loss A/c i. Gross Loss Gross loss is a debit balance of a trading A/c i.e. the balancing figure on the credit side and, thus, it is always debited in the profit and loss A/c “To Gross loss b/d”. But in most of the firms, generally gross profit takes place, which is transferred to the credit side of the profit and loss A/c. ii. Office and Administrative Expenses All the expenses of revenue nature i.e. the annual expenses, which are incurred in course of the general office and administrative performance fall under this head. These expenses are of indirect nature. These are also, termed as management expenses and are debited in profit and loss A/c. The examples of such expenses are: Salary Bank charges Rent, rates and taxes Audit fees Lighting and heating Printing and stationery Telephone charges General expenses Postage and telegrams Trade expenses Stationeries and Office Goods Legal charges Administrative expenses

142 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal iii. Selling and Distribution Expenses These are also indirect expenses. The expenses, which are incurred for the promotion of sales and distribution of goods and services, are known as selling and distribution expenses. These expenses are also debited in the profit and loss A/c. The following are some examples of such expenses: Packing expenses Warehouse rent/expenses Godown rent/ insurance, etc. Advertising expenses Publicity expenses Carriage out Freight out Showroom expenses Sales agent’s salary and commission Traveller’s salary and commission Export duty Bad debts Selling expenses Distribution expenses Brokerage Sampling expenses iv. Financial and other expenses All the non-productive but indirect expenses other than the office and selling and distribution expenses fall under this category. Discount, commission, interest, depreciation, etc. are of this type and also debited in profit & loss A/c. Credit Side Items of Profit and Loss A/c i. Gross profit Gross profit is a credit balance of trading A/c i.e. the balancing figure on the debit side and thus it is always credited in profit and loss A/c as “By Gross profit b/d”. ii. Indirect income and profit All the indirect incomes, gains and profits are mentioned on the credit side of profit and loss A/c. Such incomes are: Discount received Commission received Rent from sublet Rent from tenants Miscellaneous receipts Interest received from bank Interest received from investment Dividend received Income earned Profit on sale of old asset normal profit Bad debt recovered Apprentice premium, etc. Specimen and Preparation of Profit and Loss A/c Profit and Loss A/c of .................Co. Dr. For the year ended ..................... Cr. Particulars Amount Particulars Amount To Gross loss b/d ............ By Gross profit b/d ............ To Salaries ............ By Discount received ............ To Salaries and wages ............ By Discount on purchase ............

143 Approved by CDC, Nepal Final Accounts To Rent rates & taxes ............ By Commission received ............ To Printing & stationery ............ By Rent from sublet ............ To Postage and telegram ............ By Rent received ............ To Telephone charges ............ By Rent from tenant ............ To Audit fees ............ By Miscellaneous receipts ............ To Legal charges ............ By Interest earned/received ............ To Insurance ............ By Income earned ............ To General expenses ............ By Dividend received ............ To Office expenses ............ By Bad debt recovered ............ To Administrative expense ............ By Interest from bank ............ To Lighting and heating ............ By Interest from investment ............ To Trade expenses ............ By Profit on sale of old asset ............ To Bank charges ............ By Other indirect profit /gains/incomes ............ To Establishment expenses ............ By Provision for doubtful debt ............ To Repairs and maintenance ............ By Apprenticeship premium ............ To Licence fees ............ By Appreciation of fixed assets ............ To Conveyance ............ By Interest on drawing ............ To Depreciation ............ By compensation received ............ To Packing expenses ............ By Discount on Creditors ............ To Warehousing expenses ............ By Gain on revaluation of fixed assets ............ To Advertising & publicity ............ By Income tax returned ............ To Carriage out ............ By Transfer fee received ............ To Freight out ............ By Interest on loan to others ............ To loss of goods by Accident/Fire/Theft ............ By Provision for depreciation ............ To Entertainment/Refreshment Expenses ............ By Provision for taxation ............ To Charity ............ By Sale of scrap ............ To Sampling ............ By Net loss c/d ............ To Export duty ............ (Balancing Figure) To Sales tax ............ To Free sample distribution ............ To Brokerage ............ To Bad debt/Bad debt written off ............ To Collection expenses ............ To Traveller’s expenses ............ To Selling expenses ............ To Unproductive wages ............ To Distribution expenses ............ To Sample distribution ............ To Show room expenses ............ To Salesman’s expenses ............ By Goodwill written off ............ To Loss on sale of old asset ............

144 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal By Amortization of goodwill ............ To Discount ............ To Preliminary expenses written off ............ To Commission ............ To Interest on loan/interest allowed ............ To Interest on bank overdraft ............ To Interest on capital ............ To Net profit c/d ............ (Balancing Figure) Total ............ Total ............ Procedures of Preparing Profit and Loss Account Following are the procedures of preparing profit and loss account. 1. It is prepared in the form of ledger account and thus, it contains two sides i.e. debit and credit. 2. The gross profit should be entered in credit side and the gross loss in debit side. 3. The word ‘To’ and ‘By’ should be used in debit and credit side respectively. 4. All the indirect expenses, losses and nominal account are entered in debit side and the indirect incomes and gains are entered in credit side of profit and loss A/c. 5. The net profit and net loss of the business firm should be determined by comparing the total of debit side and the total of credit side. 6. The balancing figure appearing in debit side is termed as net profit under the word “To net profit c/d” and the balancing figure appearing in credit side is termed as net loss under the word, “By net loss c/d”. 7. After determination of net profit or net loss, it should be closed by drawing two parallel lines. Note: Nowadays for convenience, Trading and Profit and Loss Account are combined together and it is known as ‘Trading and profit and Loss Account’. First part is prepared to ascertain the gross profit or gross loss and the second part is prepared for net profit or net loss. Illustration - 3 From the following information, prepare Profit and Loss A/c of ABC Co., Kathmandu for the fiscal year 2078/079. Particulars Amount Particulars Amount Office rent Gross profit Commission paid Interest received Carriage on sales Sundry receipts Audit fees 2,000 18,000 700 600 1,200 400 1,700 General expenses Salaries Discount allowed Insurance Distribution expenses Lighting and heating 1,500 4,500 500 1,300 800 300

145 Approved by CDC, Nepal Final Accounts Solution: Profit and Loss A/c of ABC Co., Kathmandu Dr. For the year ended 2078/079 Cr. Particulars Amount Particulars Amount To Office rent To General expenses To Salaries To Commission To Discount To Insurance To Carriage on sales To Distribution expenses To Lighting and heating To Audit fees To Net profit c/d 2,000 1,500 4,500 700 500 1,300 1,200 800 300 1,700 4,500 By Gross profit b/d By Interest received By Sundry receipt 18,000 600 400 Total: 19,000 Total: 19,000 Illustration - 4 From the following information taken from the books of Jagat Bros, for the year ended 30th Chaitra, 078, prepare Profit and Loss A/c. Particulars Amount Particulars Amount Staff salaries Office rent Bank charges Advertisement & publicity Traveller’s salary & commission Gross profit Interest from bank Dividend received 8,000 2,500 700 1,300 1,900 22,000 1,100 2,900 Stationers General expenses Administrative expenses Legal charges Discount allowed Carriage out Sampling expenses 1,000 1,500 2,500 600 450 1,550 1,200 Profit and Loss A/c of Jagat Bros. Dr. For the year ended 30th Chaitra, 078 Cr. Particulars Amount Particulars Amount To Staff salaries To Stationers To Office rent To General expenses To Bank charges To Administrative expenses To Advertisement & publicity To Legal charges To Traveller’s salary and commission To Discount allowed To Carriage out To Sampling expenses To Net profit c/d 8,000 1,000 2,500 1,500 700 2,500 1,300 600 1,900 450 1,550 1,200 2,800 By Gross profit b/d By Interest from bank By Dividend received 22,000 1,100 2,900 Total: 26,000 Total: 26,000

146 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Illustration - 5 Prepare Trading A/c and Profit and Loss A/c from the following balances. Particulars Amount Particulars Amount Stock at commencement Sales Sales return Carriage out Manufacturing wages Factory expenses Rent rates and insurance Interest (Cr.) Stationery Closing stock was valued at Rs. 1,800 15,000 100 50 2,200 450 600 300 50 2,000 Purchase Purchase returns Carriage in Freight and duty, etc. Coal & fuel Salary Commission Discount (Cr.) Trading expenses 8,000 200 150 120 80 1,700 650 600 180 Solution: Trading A/c of ......... Dr. For the year ended .......... Cr. Particulars Amount Particulars Amount To Opening stock To Purchase 8,000 Less: Returns - 200 To Carriage in To Freight and duty, etc. To Manufacturing wages To Coal & fuel To Factory expenses To Gross profit c/d 1,800 7,800 150 120 2,200 80 450 4,300 By Sales 15,000 Less: Returns - 100 By Closing stock 14,900 2,000 Total: 16,900 Total: 16,900 Profit and Loss A/c .............. Dr. For the year ended .......... Cr. Particulars Amount Particulars Amount To Carriage out To Salary To Rent, rates and insurance To Commission paid To Stationery To Trading expenses To Net profit c/d 50 1,700 600 650 50 180 1,970 By Gross profit b/d By Interest received By Discount received 4,300 300 600 Total: 5,200 Total: 5,200

147 Approved by CDC, Nepal Final Accounts Exercise A. Answer the following questions in one sentence. 1. What is profit and loss account? 2. How is the net profit determined? 3. How is net loss determined? 4. What is depreciation? 5. What is indirect income? 6. What are indirect expenses? 7. What is loss on sale of old asset? 8. What are selling and distribution expenses? 9. What will be the result if total of credit is excess than total of debit of P & L A/c? 10. What is adjustment? B. Give short answers to the following questions. 11. What is profit and loss account? Explain any four objectives. 12. Describe any five points of importance of profit and loss account. 13. Draw-up a common specimen of profit and loss account with their respective debit and credit items. NUMERICAL PROBLEMS 1. From the following particulars, prepare profit & loss account to find out net profit or net less of Roj & company. Particulars Amount Particulars Amount Gross profit Salary Discount received Carriage out 90,000/- 15,000/- 1,000/- 9,000/- Interest Depreciation Dividend received Advertisement 2,000/- 6,000/- 5,000/- 10,000/- Ans: Net profit Rs. 54,000 2. Prepare the Profit and Loss A/c of Santosh & Co., Bardiya on the basis of the following particulars as on 31st Ashad, 2078. Particulars Amount Particulars Amount Gross Profit Loss by Accident Dividend Received Audit Fee 50,000 15,000 25,000 5,000 Rent Received Export Duty Bad debts Recovered Legal Charge 15,000 10,000 10,000 5,000 Ans: Net profit Rs. 65,000

148 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 3. Prepare the Profit and Loss A/c of Bhabilal & Company, Baglung on the basis of the following particulars as on 31st Ashad, 2078. Particulars Amount Particulars Amount Profit on sales of assets Depreciation Rent Received Interest on Loan 22,000 5,000 12,000 9,000 Income from Investment Bad debts Gross Loss Repairs 7,000 5,000 12,000 7,000 Ans: Net profit Rs. 3,000 4. Prepare the Profit and Loss A/c of S & J Stores, Chitwan for the fiscal year 078/079. Particulars Amount Particulars Amount Gross Loss Sale of Scrap Income from Investment Discount on Purchase 210,000 25,000 65,000 55,000 Trade Expenses Interest on Loan Profit on Sale of Fixed Assets Commission to Salesman 25,000 10,000 95,500 12,000 Ans: Net loss Rs. 16,500 5. Prepare the Profit and Loss A/c of X to Z Stores, Chitwan for the fiscal year 078/079. Particulars Amount Particulars Amount Gross Profit Loss on Sale of Fixed Assets Sale of Scrap Discount on Sales 30,000 25,000 10,000 25,000 Rent Earned Repairs and Maintenance Interest on Loan Commission Received 22,000 15,000 8,000 10,000 Ans: Net loss Rs. 1,000 6. On the basis of following stocks of Super Company, prepare Trading and P/L account at the end Ashadh, 2078. Particulars Amount Particulars Amount Purchase Wages Purchase return Sales Advertisement Stationery and printing 4,00,000 35,000 5,000 1,42,000 50,000 25,000 Carriage House rent and taxes Opening stock Sales return Salary Legal fees 30,000 3,000 2,00,000 6,000 1,10,000 3,00 Ans: Gross Loss Rs. 4,96,000, Net Loss Rs. 7,14,300 7. On the basis of following transactions of Harati Enterprises, prepare Trading and P & L account for the end of fiscal year 31st Ashadh, 2078. Particulars Amount Particulars Amount Opening stock Sales Coal and water Rent received Carriage inwards Purchase Salary Legal fee Sales return 55,000 60,000 1,500 35,000 2,000 40,000 35,000 4,000 6,000 Closing stock Purchase return Audit fee Carriage outwards Interest on investment Labour and worker Commission and discount received Income from investment Expenses for factory 45,000 9,000 11,000 12,000 18,000 25,000 3,000 25,000 20,000 Ans: Gross loss Rs. 35,500, Net loss Rs. 16,500

149 Approved by CDC, Nepal Final Accounts S.L.C/SEE Examination Questions 8. Prepare a profit and loss account of Kamal Industry Ltd. for the year end of Ashad, 2058 from the following particulars. (2058R) Particulars Amount Particulars Amount Gross profit Trade expenses Commission received Interest received House rent received 1,00,000/- 5,000/- 10,000/- 2,000/- 25,000/- Salaries Bank charges Discount on sales Interest expenses Travelling expenses 40,000/- 500/- 3,000/- 11,000/- 15,000/- (Ans: Net Profit Rs. 62,500) 9. Prepare a Profit and Loss Account of Bhaktapur Shoes Factory of 31st Ashadh, 2061 from the following transactions. (SLC 2061 ‘R’). Particulars Amount Particulars Amount Gross profit Advertising Rent received Stationary 3,56,000 25,000 50,000 18,000 Discount on purchase Interest received Insurance Carriage outward 5,000 21,000 33,000 40,000 (Ans: Net Profit Rs. 3,16,000) 10. Prepare a Profit and Loss Account of Daliyan Limited for the year ended 2001. (Board) Particulars Amount Particulars Amount Gross profit Trade expenses Salaries Discount Rent earned Interest on investment 3,000 1,100 1,200 2,000 8,000 1,000 Depreciation Postage and telegram Insurance Advertisement Miscellaneous Bad debt 2,200 2,500 500 1800 800 1,000 (Ans: Net loss Rs. 1,100) 11. Prepare a Profit and Loss Account of Bibek and Co. for the end of Ashadh, 2060 from the following particulars. (Board 060) Particulars Amount Particulars Amount Salaries Advertisement Printing and stationery Insurance Bad debt Bank charges 80,000 2,000 4,500 2,000 3,000 1,500 Gross profit Interest received Legal charges Audit fee Commission received Depreciation 1,25,000 20,000 5,000 2,000 10,000 5,000 (Ans: Net Profit Rs. 50,000)

150 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 12. Prepare a Profit and Loss Account of Sherpa Carpet Industry Pvt. Ltd. of 32nd Asar, 2063 according to the following transactions: (2063R) Particulars Amount Particulars Amount Gross profit Stationery Commission received Carriage received Advertisement 5,22,000 25,000 50,000 41,000 60,000 Salary Interest received Telephone charge Entertainment expenses 1,36,000 18,000 24,000 20,000 (Ans: Net Profit Rs. 3,66,000) 13. Prepare profit and loss account of Hetauda Company Pvt. Ltd. for the fiscal year end of Ashadh 2067/68 according to the following transactions. 2068 (R) Particulars Amount Particulars Amount Gross Profit Profit in Investment Commission Received Advertisement 1,85,000/- 11,000/- 4,000/- 15,000/- Salary Tax Interest Paid Audit Fees 81,000/- 7,000/- 20,000/- 10,000/- Ans: Net profit = Rs. 67,000 14. Prepare a profit and loss account of Pathibhara General Store for the year 2068/69 Ashadh. SLC 2069 Particulars Amount Particulars Amount Salary Stationary Carriage award Doubtful debt 95,000 13,000 4,000 19,000 Insurance premium Dividend received Discount received Gross Profit 15,000 18,000 11,000 1,49,000 Ans: Net Profit Rs. 32,000 15. Prepare the profit and loss account of Pashupati Grill Industry as an 31st Ashadh, 2070 from the following particulars. SLC 2070 Particulars Amount Particulars Amount Gross loss Purchase discount House rent Received bonus 2,00,000 16,000 60,000 34,000 Advertisement Rent received Salary 15,000 50,000 90,000 Ans: Net loss Rs 2,65,000 16. Prepare profit and loss account of D and D store as on 30th Asar, 2071 from the following particulars. 2072 Particulars Amount Particulars Amount Gross loss Depreciation Dividend received Selling expenses 4,00,000 24,000 30,000 50,000 Interest received Doubtful debt Salary Stationery 20,000 15,000 90,000 16,000 Ans: Net profit Rs. 2,55,000/-