Question

ACCOUNTS DEBIT £ CREDIT £ Cash in hand 3,400 Bank Balance 18,660 Stock 1st Jan 2016 46,000 Purchase 150,200 purchase returns 600 Freehold premises 38,600 Incidental trade expenses 840 Insurance 1,640 Audit fees 280 Commission received 3,300 Bank overdraft 4,000 Interest on Bank Overdraft 200 Trade Debtors 36,000 Trade Creditors 34,670 Wages 25,000 Salaries 14,000 Capital 114,000 Drawings 5,000 Income tax 1,600 Investments 4,000 Discount allowed 6,300 Discount received 4600 Sales return 550 sales 201350 Bills receivable 3,200 Office furniture 3,050 Rent 4,000 362,520 362,520 Adjustments: a) Stock at 31 December 2017 is £ 52,000 b) Write off 5% depreciation on freehold premises and 10% on office furniture c) Unpaid wages are £ 4,200 d) Insurance to the extent of £ 200 relates to the year 2017 – 2018 e) Charge interest on capital @ 5% and 300 on drawings. f) Rent is payable at the rate of £ 400 per month. Required: 1) Prepare Trading & Profit and Loss account for the year ended 31 December 2017 2) Prepare Balance Sheet as on 31 December 2017

Answer 1

Trading Account

Expenses or Losses	Amount in £	Incomes or Gains	Amount in £
Opening stock	46000	Sales                            201350 Less sales return              550	200800
Purchases                       150200 Less purchases returns       600	149600	Closing stock	52000
Incidental trade expenses	840
Gross profit	56360
Total	252800		252800

Profit and Loss Account

Expenses or Losses	Amount in £	Incomes or Gains	Amount in £
		Gross profit (from trading account)	56360
Salaries	14000	Commission Received	3300
Wages                               25000 Less unpaid wages            4200	20800	Discount received	4600
Insurance	1440
Audit fee	280
Interest on bank overdraft	200
Discount allowed	6300
Rent	4000
Interest on capital	570
Net profit	16670
Total	64260		64260

Balance Sheet

Liabilities	Amount in £	Assets	Amount in £
Capital                             114000 Add net profit                  16670 Less drawings                     5000	125670	Current Assets:
Current Liabilities:		Cash in hand	3400
Trade creditors	34670	Cash at bank	18660
Accrued rent	800	Trade debtors	36000
		Bills receivables	3200
Others:		Prepaid insurance for next year	200
Investments	4000	Fixed Assets:
		Freehold Premises        38600 Depreciation                     1930	36670
		Office furniture               3050 Depreciation                       305	2745
		Adjusted balance	64265
Total	165140	Total	165140

Explanation of Adjustments

1. Closing stock = 52000
2. 5% depreciation on freehold premises and 10% depreciation on office furniture

Freehold premises = 38600

Depreciation = 38600 * 5/100 = 1930

Office furniture = 3050

Depreciation = 3050 * 5/100 = 305

3. Unpaid wages = 4200

Wages = 25000

Unpaid wages deducted from wage

Wage expense = 25000 – 4200 = 20800

4. Prepaid insurance for next year = 200

Insurance = 1640

1640 – 200 =1440 (entered in profit and loss account)

200 is a prepaid insurance treated as an asset, and it is added in the balance sheet

5. 5% interest on capital

Capital = 114000

Interest on capital = 114000 * 5/100 = 570(entered as an expense in profit and loss account)

6. Rent per month is 400

Rent for year is = 4800                 (400 * 12 = 4800)

Rent paid = 4000

So that accrual rent = 4800 – 4000 = 800 (entered as a liability in balance sheet)