The Hindu Business Line : Profit puzzle in the single entry jigsaw

THE information in Table 1 relates to the business of Mr Shiv Kumar who requests you to prepare a Trading and Profit & Loss Account for the year ended March 31, 2003 and a balance-sheet as on that date.

b) Cash transactions during the year, besides certain other items, include the ones shown in Table 2.

c) Other information: i) Bills receivable drawn during the year amount to Rs 20,000 and bills payable accepted, Rs 16,000; ii) Some items of old furniture, whose written down value on March 31, 2002, was Rs 20,000 was sold on September 30, 2002, for Rs 8,000.

Depreciation is to be provided on building and furniture at 10 per cent per annum and on motorcar at 20 per cent per annum. Depreciation on sale of furniture to be provided for six months and for additions to building for whole year;

iii) Of the debtors, a sum of Rs 8,000 should be written off as bad debt and a reserve for doubtful debts is to be provided at 2 per cent;

iv) Mr Shivkumar has been maintaining a steady gross profit rate of 30 per cent on turnover;

v) Outstanding salary on March 31, 2002, was Rs 8,000 and on March 31, 2003, was Rs 10,000 on March 31, 2002. Profit and loss account had a credit balance of Rs 40,000;

vi) 20 per cent of total sales and total purchases are to be treated as for cash; and

vii) Additions in furniture account took place in the beginning of the year and there was no opening provision for doubtful debts.

The question is on preparation of final accounts for Mr Shiv Kumar for the year ended March 31, 2003, from incomplete records, what is popularly called as single entry. The following notes would explain Tables 10 to 12 prepared to supplement the P&L account and the balance-sheet as at March 31, 2003.

A complete reading of the question would signify that there are other payments and receipts apart from the cash transactions as available in the question. These are payment towards bills accepted, additions to building, purchase of furniture receipts towards bills receivable, sale of furniture. Ledger accounts, as shown in Tables 4 to 7, would help to ascertain the above receipts and payments.

Table 3 shows the cash and bank account (April 1, 2002 to March 31, 2003). This has been prepared in order to ascertain whether there is any balancing figure in the cash book being receipt/payment not available straight in the question. You will find that after giving effect to the cash transactions as given in the question and after posting the payments and receipts as worked out in Tables 4 to 7 (the bills payable, the bills receivable, building and furniture accounts respectively), the cash book is complete and there is no balancing figure. If there is one, perhaps it has to be assumed as drawings of the proprietor or additional capital introduced by him during the year 2002-03.

In the question, the details of opening stock, closing debtors and closing creditors are mentioned as nil. However, when the information in the problem is considered it can be seen that these balances are not nil and are calculated as follows:

Purchases = cash + credit = 48,000 + (80/20)(48,000) = 48,000 + 1,92,000 = 2,40,000

Sales = cash + credit = 80,000 + (80/20)(80,000) = 80,000 + 320,000 = 4,00,000

Gross profit = 30 per cent of 4,00,000 = 1,20,000

Therefore, cost of goods sold = 4,00,000 - 1,20,000 = 2,80,000

Opening stock + purchases - cost of goods sold = closing stock

Let opening stock be X.

Then, X + 2,40,000 - 2,80,000 = 40,000

X = 40,000 + 2,80,000 - 2,40,000 = 40,000 + 40,000 = Rs 80,000

Opening stock thus = Rs 80,000

The figures of closing debtors and closing creditors can be arrived by preparing accounts of debtors and creditors (see Table 7 and 8) after working out the accounts of bills receivable and bills payable (see Tables 4 and 5).

Miscellaneous trade expenditure = salary paid - opening outstanding salary + closing outstanding salary = 80,000 - 8, 000 + 12,000 = Rs 82,000

Calculation of depreciation is another issue in the problem. The closing balances of assets given in the question are before depreciation for the year, which information is not pertinently stated in the question. However, other information (c)(ii) and (c)(vii) would signify that the figures of closing balances of assets are before depreciation.

Depreciation is calculated as under:

On building: On opening balance — Rs 32,000; on additions (full year depreciation) — Rs 4,000; total = Rs 36,000

On furniture: On opening balance (except sales) — Rs 4,000; on assets sold (half year) - (10 per cent, six months, Rs 20,000) — Rs 1,000

On additions: 10 per cent on Rs 28,000 (full year) — Rs 2,800; total — Rs 4,000 + Rs 1,000 + Rs 2,800 = Rs 7,800

On motorcar: 20 per cent of Rs 80,000 = Rs 16,000

Total depreciation for the year = Rs 36,000 + Rs 7,800 + Rs 16,000 = Rs 59,800.

The opening balance-sheet as at April 1, 2002, is shown in Table 11 (the sundry creditors account). The opening capital is the balancing figure.

Using all the figures calculated as above and further information provided in the question, the P&L account (Table 10) and the balance-sheet (Table 12) as at March 31, 2003, are finally drawn.

Insolvent partner

NEPTUNE, Jupiter, Venus and Pluto had been carrying on business in partnership, sharing profits and losses in the ratio of 3:2:1:1. They decide to dissolve the partnership on the basis of the balance-sheet (Table 13) as on April 30, 2003:

i) The assets were realised as follows: debtors — Rs 24,000; stock — Rs 60,000; furniture — Rs 16,000; and premises — Rs 90,000.

ii) Expenses of dissolution amounted to Rs 4,000.

iii) Further, creditors of Rs 12,000 had to be met.

iv) General reserve, unlike capital reserve, was built up by appropriation of profits.

Draw up the realisation account, partners' capital accounts and the cash account assuming that Venus became insolvent and nothing was realised from his private estate. Apply the principles laid down in Garner vs Murray.

This question is fairly simple on the dissolution of partnership with one partner becoming insolvent. The rule that emerged from the Garner vs Murray case is applied to adjust the loss, if any, due to insolvency. This rule states that the loss due to insolvency of a partner is to be charged to the other solvent partners who have a credit balance in their accounts in the ratio of capitals just before dissolution. The following notes emerge:

i) Realisation loss is Rs 1,26,000. This is after taking into account that the creditors further paid Rs 12,000;

ii) This loss is debited to the partners capital account at 3:2:1:1;

iii) General reserve and capital reserve as existing in the balance-sheet is credited to partners at 3:2:1:1;

iv) After the above transfers, it is found that the capital accounts of Venus and Pluto show dr. balances of Rs 18,000 and Rs 20,000 respectively;

v) Venus is insolvent but Pluto is solvent. Hence, Pluto would pay Rs 20,000 to the firm — debit cash and credit capital account of Pluto;

vi) Loss on account of insolvency of Venus of Rs 18,000 is to be charged to Neptune and Jupiter only as Pluto's balance is on debit;

vii) The capital ratio for charging Venus's balance of Rs 18,000 (debit) would be capital plus the profits earned till dissolution.

Thus, general reserve credit to partners will also be taken for the purpose of establishing the ratio between Neptune and Jupiter;

viii) The capital ratio just before dissolution between Neptune and Jupiter, hence, would be: (Rs 1,00,000 + Rs 24,000) : (Rs 60,000 + Rs 1,60,000), that is, 124:76 or 31:19;

ix) Thus, Neptune will be debited with (31/50)(18,000) = 11,160 and Jupiter (19/50)(18,000) = Rs 6,840;

x) Finally, the partners Neptune and Jupiter are paid Rs 64,840 and Rs 37,160 respectively being the credit. Balance in their capital accounts;

xi) Realisation loss need not be brought in by cash by partners as the same has to be again returned back.

The realisation, partners' capital and cash accounts are presented in Tables 14, 15 and 16 respectively.

(To be continued)

(Suggested answers to the November 2003 CA (PE II) paper on accountancy.)

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