Name: Priyanka Roy Banerjee Roll No- 520916107 Study Center-

Subject: FINANCIAL & MANAGEMENT ACCOUNTING Assignment No- MB0025- Set 1 Date of submission- July, 2010

1. What is accounting cycle? List the sequential steps involved in Accounting cycle? The Accounting Cycle is a series of steps which are repeated every reporting period. The process starts with making accounting entries for each transaction and goes through closing the books. Use this tutorial for an overview of the accounting cycle, covering activities required both during and at the end of the accounting period. Accounting Cycle Steps During the Accounting Period These accounting cycle steps occur during the accounting period, as each transaction occurs: Identify the transaction through an original source document (such as an invoice, receipt , cancelled check, time card, deposit slip, purchase order) which provides: Date Amount Description (account or business purpose) Name and address of other party (if practical) Analyze the transaction determine which accounts are affected, how (increase or decrease), and how much Make Journal entries record the transaction in the journal as both a debit and a credit Journals are kept in chronological order Journals may include sales journal, purchases journal, cash receipts journal, cash payments journal, and the general journal Post to ledger transfer the journal entries to ledger accounts ledger is kept by account ledger accounts may be T-account form or include balances (Learn more about the Chart of Accounts.) Accounting Cycle: Steps at the end of the accounting period These accounting cycle steps occur at the end of the accounting period: Trial Balance this is a calculation to verify the sum of the debits equals the sum of the credits. If they dont balance, you have to fix the unbalanced trial balance before you go on to the rest of the accounting cycle. (If they do balance you could still have a problem, but at least it balances!) Adjusting entries prepare and post accrued and deferred items to journals and ledger T-accounts Adjusted trial balance make sure the debits still equal the credits after making the period end adjustments Financial Statements prepare income statement, balance sheet, statement of retained earnings, and statement of cash flows (this can occur at other points in time with appropriate adjustments) Closing entries prepare and post closing entries to transfer the balances from temporary accounts (such as the revenue and expenses from the income statement to owners equity on the balance sheet). After-Closing trial balance final trial balance after the closing entries to make sure debits still equal credits.

2. A. Bring out the difference between Indian GAAP and US GAAP norms? Some of these major differences between US GAAP and Indian GAAP which give rise to differences in profit are highlighted hereunder: 1. Underlying assumptions: Under Indian GAAP, Financial statements are prepared in accordance with the principle of conservatism which basically means Anticipate no profits and provide for all possible losses. Under US GAAP conservatism is not considered, if it leads to deliberate and consistent understatements. 2. Prudence vs. rules: The Institute of Chartered Accountants of India (ICAI) has been structuring "rule oriented", detailed and Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence' as the principle in contrast to the US GAAP, which are complex. It is quite easy for the US accountants to handle issues that fall within the rules, while the International Accounting Standards provide a general framework of accounting standards, which emphasize "substance over form" for accounting. These rules are less descriptive and their application is based on prudence. US GAAP has thus issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS 50 (Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc. 3. Format/ Presentation of financial statements: Under Indian GAAP, financial statements are prepared in accordance with the presentation requirements of Schedule VI to the Companies Act, 1956. On the other hand, financial statements prepared as per US GAAP are not required to be prepared under any specific format as long as they comply with the disclosure requirements of US GAAP. Financial statements to be filed with SEC include 4. Consolidation of subsidiary companies: Under Indian GAAP (AS 21), Consolidation of Accounts of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.Thus, the picture of the Group . Savvy promoters financial income of any company taken in isolation neither reveals the quantum of business between the group companies nor does it reveal the true hive off their loss making divisions into separate subsidiaries, so that financial statement of their Flagship Company looks attractive .Under US GAAP (SFAS 94), Consolidation of results of Subsidiary Companies is mandatory, hence eliminating material, inter company transaction 5. and giving a true picture of the operations and Profitability of the various majority owned Business of the Group. Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in financial whose turnover for the accounting period exceeds Rs. 50 crore. Thus, unlisted statements is mandatory only for companies whose share are listed on recognized stock exchanges and Certain enterprises companies escape the burden of providing cash flow statements as part of their financial statements. On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow statements for 3 years current year and 2 immediate preceding years irrespective of whether the company is listed or not . 6. Investments: Under Indian GAAP (AS 13), Investments are classified as current and long term. These are to be further classified Government or Trust securities, Shares, debentures or bonds Investment properties others-specifying nature. Investments classified as current investments are to be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Investments classified as long

term investments are carried in the financial statements at cost. However, provision for diminution is to be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Under US GAAP (SFAS 115) , Investments are required to be segregated in 3 categories i.e. held to Maturity Security ( Primarily Debt Security) , Trading Security and Available for sales Security and should be further segregated as Current or Non current on Individual basis. Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. All Other securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity 7. Depreciation: Under the Indian GAAP, depreciation is provided based on rates prescribed by the Higher depreciation provision based on estimated useful life of the assets is Companies Act, 1956.

permitted, but must be disclosed in Notes to Accounts. (Guidance note no 49). Depreciation cannot be provided at a rate lower than prescribed in any circumstance. Similarly, there is no compulsion to provide depreciation at a higher rate, even if the actual wear and tear of the equipments is higher than the rates provided in Companies Act. Thus, an Indian Company can get away with providing with lesser depreciation, if the same is in compliance to Companies Act 1956. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out. 8. Foreign currency transactions: Under Indian GAAP (AS11) Forex transactions (Monetary items) are recorded at the rate prevalent on the transaction date .Year end foreign currency assets and liabilities (Non Monetary Items) are re-stated at the closing exchange rates. Exchange rate differences arising on payments or realizations and restatements at closing exchange rates are treated as Profit /loss in the income statement. Exchange fluctuations on liabilities incurred for fixed assets can be capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. Capitalization of exchange fluctuation arising from foreign liabilities incurred for acquiring fixed assets does not exist. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place. US GAAP also permits use of Average monthly Exchange rate for Translation of Revenue, expenses and Cash flow items, whereas under Indian GAAP, the closing exchange rate for the Transaction date is to be taken for translation purposes. 9. Expenditure during Construction Period: As per the Indian GAAP (Guidance note on Treatment of expenditure during construction period' ) , all incidental expenditure on Construction of Assets during Project stage are accumulated and allocated to the cost of asset on completion of the project. Contrary to this, under the US GAAP (SFAS 7) , such expenditure are divided into two heads direct and indirect. While, Direct expenditure is accumulated and allocated to the cost of asset, indirect expenditure are charged to revenue. 10. Research and Development expenditure: Indian GAAP ( AS 8) requires research and development expenditure to be charged to profit and loss account, except equipment and machinery which are capitalized and depreciated. Under US GAAP ( SFAS 2) , all R&D costs are expenses except intangible

assets purchased from others and Tangible assets that have alternative future uses which are capitalised and depreciated or amortised as R&D Expense. Under US GAAP, R&D expenditure incurred on software development are expensed until technical feasibility is established ( SOP 81.1) . R&D Cost and software development cost incurred under contractual arrangement are treated as cost of revenue. 11. Revaluation reserve : Under Indian GAAP, if an enterprise needs to revalue its asset due to increase in cost of replacement and provide higher charge to provide for such increased cost of replacement, then the Asset can be revalued upward and the unrealised gain on such revaluation can be credited to Revaluation Reserve ( Guidance note no 57). The incremental depreciation arising out of dressing some promoters misutilise this facility to hoodwink 12. higher book value may be adjusted against the Revaluation Reserve by transfer to P&L Account. However for window the shareholders on many occasions. US GAAP does not allow revaluing upward property, plant and equipment or investment. Long term Debts: Under US GAAP , the current portion of long term debt is classified as current liability, whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability. 13. Extraordinary items, prior period items and changes in accounting policies: Under Indian GAAP( AS 5) , extraordinary items, prior period items and changes in accounting policies are disclosed without netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are required to be made while reporting the Prior period Items. 14. Goodwill: Under the Indian GAAP goodwill is capitalized and charged to earnings over 5 to 10 years period. Under US GAAP ( SFAS 142) , Goodwill and intangible assets that have indefinite useful lives are not amortized ,but they are tested at least annually for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit. 15. Capital issue expenses: Under the US GAAP, capital issue expenses are required to be written off when incurred against proceeds of capitals, whereas under Indian GAAP , capital issue expense can be amortized or written off against reserves. 16. Proposed dividend: Under Indian GAAP , dividends declared are accounted for in the year to which they relate. For example, if dividend for the FY 1999-2000 is declared in Sep 2000 , then the corresponding charge is made in 2000-2001 as below the line item . Contrary to this , under US GAAP dividends are reduced from the reserves in the year they are declared by the Board. Hence in this case under US GAAP , it will be charged Profit and loss account of 2000-2001 above the line. 17. Investments in Associated companies: Under the Indian GAAP( AS 23) , investment in associate companies is initially recorded at Cost using the Equity method whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investors share of net assets of the investee. The consolidated statement of profit and loss reflects the investors share of the results of operations of the investee.are carried at cost . Under US GAAP ( SFAS 115) Investments in Associates are accounted under equity method in Group accounts but would be held at cost in the Investors own account. 18. Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment of Expenditure during Further , Indirect revenue expenditure Construction Period), direct Revenue expenditure during construction period like Preliminary Expenses, Project related expenditure are allowed to be Capitalised.

incidental and related to Construction are also permitted to be capitalised. Other Indirect revenue expenditure not related to construction, but since they are incurred during Construction period are treated as deferred revenue expenditure and classified as Miscellaneous Expenditure in Balance Sheet and written off over a period of 3 to 5 years. Under US GAAP ( SFAS 7) , the concept of preoperative expenses itself doesnt exist. SOP 98.5 also madates that all Start up Costs should be expensed. The enterprise has to prepare its balance sheet and Profit and Loss Account as if it were a normal running organization. Expenses have to be charged to revenue and Assets are Capitalised as a normal organization. The additional disclosure include reporting of cash flow, cumulative revenues and Expenses since inception. Upon commencement of normal operations, notes to Statement should disclose that the Company was but is no longer is a Development stage enterprise. Thus , due to above accounting anomaly, Accounts prepared under Indian GAAP , contain higher charges to depreciation which are to be adjusted suitably under US GAAP adjustments for indirect preoperative expenses and foreign currencies. 19. Employee benefits: Under Indian GAAP, provision for leave encashment is accounted based n for voluntary retirement scheme can be actuarial valuation. Compensation to employees who opt

amortized over 60 months. Under US GAAP, provision for leave encashment is accounted on actual basis. Compensation towards voluntary retirement scheme is to be charged in the year in which the employees accept the offer. 20. Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment premiums are adjusted against Securities Premium Account. Under US GAAP, premiums for early extinguishment of debt are expensed as incurred. B. What is Matching Principle? Why should a business concern follow this principle? The Matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are incurred (usually when goods are transferred or services rendered, e.g. sold), and offset against recognized revenues, which were generated from those expenses (related on the cause-and-effect basis), no matter when cash is paid out. In cash accountingin contrastexpenses are recognized when cash is paid out, no matter when obligations are incurred through transfer of goods or rendition of services: e.g., sale. If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are recognized as expenses in the accounting period they expired: i.e., when have been used up or consumed (e.g., of spoiled, dated, or substandard goods, or not demanded services). Prepaid expenses are not recognized as expenses, but as assets until one of the qualifying conditions is met resulting in recognition as expenses. Lastly, if no connection with revenues can be established, costs are recognized immediately as expenses (e.g., general administrative and research and development costs). Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses (cost of goods sold), but as assets (deferred expenses), until the actual products are sold. The matching principle allows better evaluation of actual profitability and performance (shows how much was spent to earn revenue), and reduces noise from timing mismatch between when costs are incurred and when revenue is realized. Two types of balancing accounts exist to avoid fictitious profits and losses that might otherwise occur

when cash is paid out not in the same accounting periods as expenses are recognized, because expenses are recognized when obligations are incurred regardless when cash is paid out according to the matching principle in accrual accounting. Cash can be paid out in an earlier or latter period than obligations are incurred (when goods or services are delivered) and related expenses are recognized that results in the following two types of accounts: Accrued expense: Expense is recognized before cash is paid out. Deferred expense: Expense is recognized after cash is paid out. An accrued expense is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision. An example is an obligation to pay for goods or services received FROM a counterpart, while cash for them is to be paid out in a latter accounting period when its amount is deducted from accrued expenses. It shares characteristics with deferred income (or deferred revenue) with the difference that a liability to be covered latter is cash received FROM a counterpart, while goods or services are to be delivered in a latter period, when such income item is earned, the related revenue item is recognized, and the same amount is deducted from deferred revenues. Deferred expenses (or prepaid expenses or prepayment) is an asset, such as cash paid out TO a counterpart for goods or services to be received in a latter accounting period when the obligation to pay is actually incurred, the related expense item is recognized, and the same amount is deducted from prepayments. It shares characteristics with accrued revenue (or accrued assets) with the difference that an asset to be covered latter are proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a later period, when its amount is deducted from accrued revenues. Examples Accrued expense allows one to match future costs of products with the proceeds from their sales prior to paying out such costs. Deferred expense (prepaid expense) allows one to match costs of products paid out and not received yet. Depreciation matches the cost of purchasing fixed assets with revenues generated by them by spreading such costs over their expected life. Accrued expenses Accrued expense is a liability usedaccording to matching principleto enable management of future costs with an uncertain timing or amount. For example, supplying goods in one accounting period by a vendor, but paying for them in a later period results in an accrued expense that prevents a fictitious increase in the receiving company's value equal to the increase in its inventory (assets) by the cost of the goods received, but unpaid. Without such accrued expense, a sale of such goods in the period they were supplied would cause that the unpaid inventory (recognized as an expense fictitiously incurred) would effectively offset the sale proceeds (revenue) resulting in a fictitious profit in the period of sale, and in a fictitious loss in the latter period of payment, both equal to the cost of goods sold. Period costs, such as office salaries or selling expenses, are immediately recognized as expenses (and offset against revenues of the accounting period) also when employees are paid in the next period. Unpaid period costs are accrued expenses (liabilities) to avoid such costs (as expenses fictitiously incurred) to offset period revenues that would result in a fictitious profit. An example is a commission earned at the moment of sale (or delivery) by a sales representative who is compensated at the end of the following week, in the next accounting period. The company recognizes the commission as an expense incurred immediately in its current income statement to match the sale proceeds (revenue), so the commission is

also added to accrued expenses in the sale period to prevent it from otherwise becoming a fictitious profit, and it is deducted from accrued expenses in the next period to prevent it from otherwise becoming a fictitious loss, when the rep is compensated. Deferred expenses A Deferred expense (prepaid expenses or prepayment) is an asset used to enable management of costs paid out and not recognized as expenses according to the matching principle. For example, when the accounting periods are monthly, an 11/12 portion of an annually paid insurance cost is added to prepaid expenses, which are decreased by 1/12th of the cost in each subsequent period when the same fraction is recognized as an expense, rather than all in the month in which such cost is billed. The not-yet-recognized portion of such costs remains as prepayments (assets) to prevent such cost from turning into a fictitious loss in the monthly period it is billed, and into a fictitious profit in any other monthly period. Similarly, cash paid out for (the cost of) goods and services not received by the end of the accounting period is added to the prepayments to prevent it from turning into a fictitious loss in the period cash was paid out, and into a fictitious profit in the period of their reception. Such cost is not recognized in the income statement (profit and loss or P&L) as the expense incurred in the period of payment, but in the period of their reception when such costs are recognized as expenses in P&L and deducted from prepayments (assets) on balance sheets. Depreciation Depreciation is used to distribute the cost of the asset over its expected life span according to the matching principle. If a machine is bought for $100,000, has a life span of 10 years, and can produce the same amount of goods each year, then $10,000 of the cost of the machine is matched to each year, rather than charging $100,000 in the first year and nothing in the next 9 years. So, the cost of the machine is offset against the sales in that year. This matches costs to sales. 3. Prove that the accounting equation is satisfied in all the following transactions of Mr. X (a) Commence business with cash Rs.50000 (b) Paid rent in advance Rs.1000 (c) Purchased goods for cash Rs.18000 and Credit Rs.20000 (d) Sold goods for cash Rs.25000 costing Rs.22000 (e) Paid salary Rs.5000 and salary outstanding is Rs.3000 (f) Bought moped for personal use Rs.20000\ Sol. Accounting Equation = Liabilities + Capital Assets Transaction Commenced Business goods for Cash + Stock 50,000 + 0 cash -18000 + 38000 per cash Rs. 32000 + 32000 = 20000 + 0 + 0 = 20,000 + 0 + 50,000 = 0 + 0 + 50,000 = Capabilities + Capital = Creditor + Salary + Capital a) With

cash 50,000 c) Purchased New Equation d) Sold

18000 and credit 20,000

goods

25,000 Costing Rs. 22,000 New Equation b) Paid Rent in advance 1,000 New Equation e) Paid Salary Rs. 5000 and Salary outstand is Rs. 53,000 New Equation f) Bought Miper for Personal use 20000 (-) 5000 + 0 51,000 + 16, 000 (-) 20,000 + 0 31,000 + 16,000 = 0 + 0 (-) 5000 = 20,000 + 3000 + 44000 = 0 + 0 20,000 = 20,000 + 3000 + 24,000 + 25,000 22,000 57,000 + 16,000 11,000 + 0 = 0 + 0 + 3000 = 20,000 + 0 + 53,000 = 20,000 + 0 + 53,000 = 20,000 + 0 + 52,000

56,000 + 16,000

Balance Sheet of X as at: Liabilities Creditor Salary outstanding Capital 47,000 Amount 20,000 3000 24,000 47,000 Assets Cash in hand Stock Amount 31,000 16,000

4. Following are the extracts from the Trial Balance of a firm as on 31st March 20X7 Sundry Debtors Provision for Doubtful Debts Provision for Discount on Debtors Bad Debts Discount Additional Information: 1) 2) 3) 4) Additional Bad Debts required Rs.4,000 Additional Discount allowed to Debtors Rs.1,000 Maintain a provision for bad debts @ 10% on debtors Maintain a provision for discount @ 2% on debtors Dr 2,05,000 Cr 10,000 1,800 3,000 1,000

Required: Pass the necessary journal entries and show the relevant accounts including final accounts. Sol. Journal Entry Particular Bad Debts A/c Dr. Discount Allowed Dr. To sundry Debtors (Being Discount Allowed Dr.) Profit shares A/c Dr. To Bad Debts To discount Allowed (Being P X L for Discount) P X L A/c Dr. To provision for Doubtful Debits To provision for discount on debtors. Profit & Loss A/c 12,200 10,000 2200 5000 9000 7000 2000 Dr. 4000 1000 Cr.

Particular To provision for Doubtful Debts To provision for discount To Bed dobts 3000 (+) Additional 4000 To Discount Allowed 1000 (+) Additional 1000 Balance Sheet Liabilities Provision for bad debts 10,000 (+) Additional 10,000 Provision for discount 1800 (+) Additional 2200

Amount 10,000 2200 7000

Particular

Amount

2000

Amount

Assets Debtors 20,500 (-) Bad Debts 4000 20,000 (-) Discount 1000

Amount

200,000

4000

5. A. Bring out the difference between trade discount and cash discount. Cash Discount Trade Discount Is a reduction granted by supplier from the list price of goods or services on business consideration re: buying in bulk for goods and longer period when in terms of services

Is a reduction granted by supplier from the invoice price in consideration of immediate or prompt payment

As an incentive in credit management to encourage prompt payment Not shown in the supplier bill or invoice Cash discount account is opened in the ledger Allowed on payment of money It may vary with the time period within which payment is received

Allowed to promote the sales

Shown by way of deduction in the invoice itself

Trade discount account is not opened in the ledger

Allowed on purchase of goods It may vary with the quantity of goods purchased or amount of purchases made

B. Explain the term (1) asset (2) liability with the help of examples. (1) Asset: assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simplistically stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the monetary value of the assets owned by the firm. It is money and other valuables belonging to an individual or business. Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, while fixed assets include such items as buildings and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs, and financial assets, including such items as accounts receivable, bonds and stocks. (2) Liability with the help of examples: a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. All type of borrowing from persons or banks for improving a business or person income which is payable during short or long time. They embody a duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand; The duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and, The transaction or event obligating the entity has already occurred. Liabilities in financial accounting need not be legally enforceable; but can be based on equitable obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral

considerations. A constructive obligation is an obligation that can be inferred from a set of facts in a particular situation as opposed to a contractually based obligation. The accounting equation relates assets, liabilities, and owner's equity: Assets = Liabilities + Owner's Equity The accounting equation is the mathematical structure of the balance sheet. The Australian Accounting Research Foundation defines liabilities as: "future sacrifice of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions and other past events." Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the IASB. Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU. Liabilities are debts and obligations of the business they represent creditors claim on business assests. Example of Liabilities All kinds of payable 1) Notes payable - an written promise. 2) Accounts Payable - an oral promise. 3) Interests Payable. 4) Sales Payable.

6. A fresh MBA student joined as trainee was asked to prepare Trial balance. He was unable to submit a correct trial balance. You, as a senior accountant find out the errors and rectify them. After redrafting the trial balance prepare trading and Profit and loss account. Particulars Capital Cash in Hand Purchases Sales Cash at bank Fixtures and Fittings Freehold premises Lighting and Heating Bills Receivable Return Inwards Salaries Creditors Debtors Stock at 1st April 2007 Printing Bills Payable Rates, taxes and insurance Discount received Discount allowed Adjustments: Debit Credit 7,670 30 8,990 11,060 885 225 1.500 65 825 30 1.075 1890 5,700 3,000 225 1,875 190 445 21,175 200 21,705

1)
2) 3) 4)

Stock on hand on 31st March 2008 was valued at Rs.1800 Depreciate fixtures and fittings by Rs.25 Rs.35 was due and unpaid in respect of salaries Rates and insurance had been paid in advance to the extent of Rs.40

Sol. Corrected Trial Balance as at 31st March 2008 Particulars Capital Cash in Hand Purchases Sales Cash at bank Fixtures and Fittings Freehold premises Lighting and Heating Bills Receivable Return Inwards Salaries Creditors Debtors Stock at 1st April 2007 Printing Bills Payable Rates, taxes and insurance Discount received Discount allowed Debit Amount 30 8,990 11,060 885 225 1.500 65 825 30 1.075 1890 5,700 3,000 225 1,875 190 445 200 22,940 22,940 Credit Amount 7,670

Trading And Profit and Loss Account for the year ended 31st March 2008

Dr.

Particular To Opening Stock To Purchase To Gross Profit c/d To Salaries 1075 Add Outstanding 35 To Lighting and heating To Printing To Rates, Taxes and Insurance 190 Less: Insurance Unpaid 40 To Discount Allowed To Depreciation of furniture & Fittings

Amount Rs. 3000 8990 840 12,830 1110 65 225

Particular By Sales 11060 Less returns 30 By Closing Stock By Gross Profit c/d By Discount By net loss Transit and to capital a/c

Amount Rs. 11030 1800 12,830 840 445 490

Cr.

150 200 25 1775

1775

Balance Sheet as at 31st March 2008 Liabilities Current Liabilities Creditors Bills Payable Outstanding Salary Capital Opening Balance 7670 Amount 1890 1875 35 Assets Current Assets Cash in Hands Cash at Bank Bill Receivable Debtors Closing Stock Unexpired Rates and Insurance Fixed Assets Furniture and fittings 225 Less: Deprecation 25 Free hold Promises 10,980 200 1500 10,980 Amount 30 885 825 5700 1800 40

Less: Net less 490

7180