Class 11 Accountancy (Financial Accounting) Chapter 9 Financial Statements – II

Key Concept: Journal Entry Identification

a) Profit and Loss A/c Dr. To Provision for discount on debtors A/c

[Solution Description] According to the syllabus, the journal entry for creating a provision for discount on debtors is:

$$\text{Profit and Loss A/c Dr. To Provision for discount on debtors A/c}$$

This means that the Profit and Loss account is debited, and the Provision for discount on debtors account is credited.

Key Concept: Basic Definition

a) Outstanding expenses are unpaid expenses at the end of an accounting period related to the current year.

[Solution Description] Outstanding expenses are expenses that have been incurred but not yet paid or recorded by the end of an accounting period. These expenses are recognized in the books as a liability. Examples include rent, wages, or utility bills that are due but not yet settled. They are added to the respective expense accounts.

Key Concept: Basic Concept

b) Credited

[Solution Description] Closing stock is credited to the trading account as it represents unsold goods at the end of the accounting period.

Key Concept: Basic Adjustments

c) Outstanding salaries

[Solution Description] Financial statements require adjustments for outstanding expenses as they represent liabilities incurred but not yet paid, affecting the net income calculation.

Key Concept: Basic Adjustment

d) Shown on the credit side of Profit and Loss A/c and assets side of Balance Sheet

[Solution Description] Accrued income is considered an asset because it represents money that is owed to the company but has not yet been received. According to the syllabus, it is added to the respective income on the credit side of the Profit and Loss A/c and shown on the assets side of the Balance Sheet.

Key Concept: Depreciation Entry

a) Depreciation A/c Dr. To Assets A/c

[Solution Description] The journal entry for recording depreciation involves debiting Depreciation Account and crediting the Asset Account to decrease its value.

The correct journal entry is:

$\text{Depreciation A/c Dr.}$

$\text{To Assets A/c}$

Key Concept: Adjustment Impact

a) Increases net profit

[Solution Description] Accrued income is an income which has been earned but not yet received. It is added to the income in the credit side of the Profit and Loss Account, which increases the net profit.

Key Concept: Basic Definition

d) Cost of unsold goods at the end of an accounting period

[Solution Description] Closing stock represents the cost of unsold goods at the end of an accounting period.

Key Concept: Basic Definition

c) Prepaid expenses

[Solution Description] The definition of prepaid expenses refers to payments made for expenses that will benefit future accounting periods.

Key Concept: Basic Definition

d) Amount not realized from debtors

[Solution Description] Bad debts refer to the amount that is not recoverable from debtors and hence considered as a loss in financial statements.

Key Concept: Basic Calculation

b) Rs.2,500

The formula for calculating commission before charging commission is $$\text{Commission} = \frac{\text{Profit before commission} \times \text{Rate of commission}}{100}$$.

To find the commission: $\text{Commission} = \frac{50000 \times 5}{100} = 2500$

Thus, the commission amount is $\text{Rs.}\,2500$.

Key Concept: Basic Calculation

c) Rs.7,500

[Solution Description] To calculate the commission before charging, we use the formula:

$$\text{Commission} = \text{Net Profit} \times \text{Rate of Commission}$$

Given:

$\text{Net Profit} = Rs.150,000$

$\text{Rate of Commission} = 5\% = 0.05$

Substitute these values into the formula:

$$\text{Commission} = 150,000 \times 0.05 = Rs.7,500$$

Therefore, the commission amount is Rs.7,500.

Key Concept: Adjustment Impact

c) Increases current assets by \$3,000

[Solution Description] Recording a prepaid insurance implies that cash or bank is credited by \$3,000 and prepaid insurance account under current assets is debited by \$3,000. Thus, it increases current assets by \$3,000 on the balance sheet.

Key Concept: Basic Concept

a) To allocate the cost of an asset over its useful life

[Solution Description] Depreciation is the allocation of the cost of a tangible asset over its useful life. It’s necessary because it reflects the wear and tear on fixed assets, helping to provide a more accurate picture of their value and ensuring that expenses are matched with revenues they help generate.

Key Concept: Basic Definition

b) Decline in asset value due to wear and tear

[Solution Description] Depreciation refers to the decline in asset value due to wear and tear and passage of time. It represents the reduction in the economic usefulness of an asset.

Key Concept: Basic Definition

c) Outstanding Expenses

[Solution Description] Expenses incurred but not yet paid by the end of an accounting period are called outstanding expenses. These unpaid liabilities must be settled in the future.

Key Concept: Basic Definition

b) To estimate potential losses from debtors

[Solution Description] The primary purpose of creating a provision for bad debts is to anticipate and allocate potential losses from customers who may not pay what they owe. This anticipatory measure ensures that financial statements present a more accurate picture of expected cash flows and net realizable value of receivables.

Key Concept: Basic Concept

b) Wear and tear

[Solution Description] Depreciation is attributed to the decline in asset value due to wear and tear and passage of time.

Key Concept: Basic Calculation

c) \$1875

[Solution Description]

The interest on the initial capital (\$15,000) for the whole year (12 months) is calculated as follows:

$$\text{Interest on initial capital} = 15000 \times \frac{10}{100} = 1500$$

For the additional capital (\$5,000), the interest is only for 9 months (July to March):

$$\text{Interest on additional capital} = 5000 \times \frac{10}{100} \times \frac{9}{12} = 375$$

Total interest = \$1500 + \$375 = \$1875.

Key Concept: Real-life Scenario

b) \$3,000

[Solution Description] The payment of \$6,000 covers the entire year from April 1 to March 31. By September 30, half of this period (6 months) have passed. The amount used up by September 30 is therefore:

$$\frac{6,000}{12} \times 6 = 3,000$$

The remaining unused portion which should be recorded as the prepaid insurance is:

$$6,000 – 3,000 = 3,000$$

Key Concept: Basic Definition

a) Cost of unsold goods

[Solution Description] Closing stock represents the cost of unsold goods at the end of an accounting period.

Key Concept: Basic Concept

c) Accrual

[Solution Description] The accrued rent indicates an expense that has been incurred but not yet paid, following the accrual accounting concept. This means recognizing expenses when they occur, regardless of payment status.

Key Concept: Basic Definition

a) A reduction in the book value of an asset over time

[Solution Description] Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. It accounts for declines in value due to wear and tear or obsolescence.

Key Concept: Basic Concept

a) Increases net profit

[Solution Description] Accrued income represents revenue that has been earned but not yet received. It is recorded as an asset and increases the total assets of the company. When accrued income is recognized, it is added to the income which results in an increase in the net profit in the Profit & Loss Account.

Key Concept: Outstanding Expenses

b) Salaries for March paid in April

[Solution Description] Outstanding expenses are those which are due but not paid during the accounting period, and thus must be included in the financial statements to accurately reflect liabilities. Salaries for March that are paid in April, for instance, are outstanding because they were incurred during March but paid later.

Key Concept: Balance Sheet Placement

a) Asset side

[Solution Description] Accrued income represents income that has been earned but not yet received by the end of the accounting period, and it is classified as an asset on the balance sheet.

Key Concept: Outstanding Expenses

b) Salaries for March paid in April

[Solution Description] Outstanding expenses are those that have been incurred but not yet paid by the end of the accounting period. These must be recognized as liabilities in the financial statements.

Key Concept: Calculation of Provision

c) \$405

[Solution Description] The first step is to find the good debtors by subtracting the provision for doubtful debts from the total debtors. So,

$$\text{Good Debtors} = \$15,000 – \$1,500 = \$13,500$$

Next, calculate the provision for discount using the given discount rate:

$$\text{Provision for Discount} = \$13,500 \times 0.03 = \$405$$

Therefore, the provision for discount on debtors is \$405.

Key Concept: Basic Concept

c) Dividend declared but not received

[Solution Description] Accrued income refers to income that has been earned but not yet received. It is recognized in the financial statements because it represents a company’s right to receive payment for services rendered or goods delivered.

Key Concept: Journal Entry Identification

a) Interest on capital A/c Dr. 700 To Capital A/c 700

[Solution Description] The journal entry for recording interest on capital is:

$$\text{Interest on capital A/c Dr. 700 To Capital A/c 700}$$

This shows that interest on capital is debited as an expense and credited to the owner’s capital account.

Key Concept: Basic Definition

d) Income Received in Advance

[Solution Description] Income received in advance refers to the money collected by a business before the actual service or product delivery, and hence it should not be recognized as revenue until earned.

Key Concept: Application of Concepts

b) \$11,000

[Solution Description] The total expense in the profit and loss account includes both the recorded wages and the outstanding wages. Therefore, the total expense will be calculated by adding \$10,000 (recorded wages) and \$1,000 (outstanding wages).

Calculation:

$$\text{Total Expense} = 10,000 + 1,000 = 11,000$$

Hence, the total expense reflected in the profit and loss account is \$11,000.

Key Concept: Basic Adjustments

b) Rent paid for the next year

[Solution Description] Prepaid expenses are those that have been paid in advance for benefits that will be received in future periods. Therefore, such expenses should be shown as an asset on the balance sheet.

Key Concept: Basic Calculation

c) \$400

[Solution Description] To find the estimated amount of uncollectible debts, calculate 4% of the total debtors. The formula used is:

$$\text{Uncollectible Debts} = \frac{4}{100} \times 10000$$

$$= 400$$

Therefore, the estimated amount of uncollectible debts is \$400.

Key Concept: Basic Identification

c) Debtors

[Solution Description] Current assets are items that are expected to be converted into cash or used up within one year. This includes debtors, bank, cash, prepaid expenses, accrued income, and closing stock.

Key Concept: Basic Definition

a) Amount that cannot be recovered from debtors

[Solution Description] Bad debts refer to amounts that cannot be recovered from debtors and are considered a loss for the business.

Key Concept: Outstanding Expenses

b) Liabilities side

[Solution Description] Outstanding expenses are added to the respective expense in the profit and loss account and shown on the liabilities side of the balance sheet as they represent obligations that need to be paid in the future.

Key Concept: Adjustment Impact

d) Increase in interest income by \$800; accrued interest shown as current asset of \$800.

[Solution Description]

The accrued interest is income earned but not yet received, thus it needs to be added to the related interest income in the Profit & Loss Account. In the balance sheet, it appears as an asset under current assets. The effect on the financial statements would be:

– Increase in Interest Income by \$800 in the Profit & Loss Account.

– Accrued Interest shown as a current asset of \$800 in the Balance Sheet.

Key Concept: Balance Sheet Placement

d) Under current assets

[Solution Description] Accrued income appears under current assets in the balance sheet as it represents an amount that will be converted into cash within one year.

Key Concept: Adjustment Purpose

b) To recognize expenses when they are incurred

[Solution Description] Outstanding expenses are those which have been incurred but not yet paid by the end of the accounting period. Adjustments for these ensure that all expenses incurred during a financial year are recorded in that year, reflecting the true financial performance and position by accurately matching income with related expenses.

Key Concept: Basic Concepts

b) To reflect the decrease in the value of the asset over time

[Solution Description] Depreciation is charged to allocate the cost of a tangible fixed asset over its useful life. This practice ensures that the expense matches with the revenue generated from using the asset, reflecting the decrease in its value due to wear and tear or obsolescence. Thus, depreciation helps show the true profit and financial position of a business.

Key Concept: Adjustment Entry Analysis

b) Decreases total expenses by \$500

[Solution Description]

To adjust prepaid insurance, the journal entry would be: $$\text{Prepaid Insurance A/c Dr. \$500 To Insurance Expense A/c}$$. This decreases the total expense recorded in the Profit & Loss Account by \$500, as prepaid expenses are deducted from total expenses to reflect the actual expense incurred during the period.